Meeting Safe Harbor Rule for 1031 Exchange if rent for tax year was very short (2023 Update)

Based on your current situation, it sounds like you may be able to qualify for the safe harbor rule for a 1031 exchange with the vacation house. The safe harbor rule states that the property must be rented for at least 14 days and used for personal use no more than 14 days (or 10% of rental days) during each of the first two years of ownership. These two years are not necessarily calendar years, but rather the two 12-month periods immediately following the purchase.

You mentioned that you closed on the property on April 29th, 2022, so the first 12-month period would be from April 29th, 2022 to April 28th, 2023, and the second 12-month period would be from April 29th, 2023 to April 28th, 2024. As you have stated that you will be reporting the rental of only 10 days on your 2022 Schedule E, it appears that you will need to rent the property for at least 4 additional days by the end of the first 12-month period, April 28th, 2023, in order to meet the safe harbor rule.

It's important to note that even if you do not meet the safe harbor rule, the IRS may still allow the exchange to qualify for 1031 treatment, but it will be more difficult to prove that the exchange was made for investment or business purposes. To further ensure that your 1031 exchange will not be challenged by the IRS, you can consider keeping accurate records of the rental history of the property, including dates of rental, rental income and expenses, and any other documentation related to the rental of the property. Additionally, you can consider consulting a tax professional or attorney who can advise you on the best course of action based on your specific circumstances.

I just thought that in addition to your particular case it may be worth posting some general info about 1031 exchange in case you see any other part that pertains to you:

A 1031 exchange, also known as a like-kind exchange, is a tax-deferral strategy that allows an investor to defer paying taxes on the sale of a property by using the proceeds from the sale to purchase a similar property. In order to qualify for a 1031 exchange, the investor must adhere to certain rules and guidelines set forth by the IRS. One of these guidelines is the "safe harbor" rule.

The safe harbor rule states that in order to qualify for a 1031 exchange, the investor must identify potential replacement properties within 45 days of the sale of the relinquished property, and close on the purchase of one of those properties within 180 days of the sale of the relinquished property, or the due date of the investor's tax return for the year of the sale, whichever comes first. The rule also requires that the investor not have received or been entitled to receive any of the proceeds from the sale of the relinquished property before the replacement property is acquired.

To meet the safe harbor rule, the investor must:

Identify potential replacement properties within 45 days of the sale of the relinquished property.

Close on the purchase of one of the identified replacement properties within 180 days of the sale of the relinquished property, or the due date of the investor's tax return for the year of the sale, whichever comes first.

Not receive or be entitled to receive any proceeds from the sale of the relinquished property before the replacement property is acquired.

It's important to note that if the safe harbor rule is not met, the investor may still be able to complete a 1031 exchange, but it may be more difficult to prove that the exchange was made for investment or business purposes. It's recommended to consult a tax professional for specific guidance on your situation.