Real estate in resort or vacation destinations can produce diverse and significant tax consequences. These tax consequences can be particularly critical at the time a property is sold, since many vacation destinations have appreciated significantly and property owners may be facing significant capital gain tax consequences upon disposition. The use of a tax deferred exchange under IRC Section 1031 can be particularly important in disposing of such property.

This publication will first address the use of Section 1031 tax deferred exchanges in disposing of vacation properties. It will then consider a number of different scenarios, and the tax consequences of each, both while the property is owned and upon disposition of the property. Last, it concludes with a few words about converting a vacation property into an investment property eligible for Section 1031.