Using Airbnb as a Rental Strategy for 1031 Exchange Properties

Using Airbnb for 1031 Exchange Properties

Using Airbnb for 1031 Exchange properties has become one of the biggest and best platforms with which real estate investors host and rent their properties. This strategy has allowed some investment properties to remain profitable even during the severe dip in travel during the COVID-19 pandemic. Whether you have stayed in an Airbnb rental yourself or heard about the endless short-term rental possibilities from a friend, hosting your investment property on Airbnb has added a new take on the traditional rental process.

This article primarily discusses Airbnb. But, many platforms allow real estate investors to rent their investment properties. We discuss other platforms in more detail later in the article. Midland 1031’s role as Qualified Intermediary is limited to acting as a qualified intermediary within the meaning of Regulations section 1.1031(k)-1(g)(4) for Federal and state income tax purposes. In this regard, Midland 1031 is not providing other legal, investment, or due diligence services. The taxpayer/exchanger must direct all investment transactions and choose the investment(s) for the exchange.

Benefits of Hosting Your Investment Property on Airbnb

The primary benefit of completing a 1031 Exchange is tax deferment. An additional benefit from using a 1031 Exchange is that it allows flexibility to diversify what type of real estate the taxpayer invests in, such as going from traditional rental to Airbnb. Aside from the 1031 Exchange benefits, Airbnb offers a new level of benefits to investment property owners in the modern age.

Control

Upon signing a lease with long-term tenants, you are already losing a large amount of control over your property. With Airbnb, you can check in on your home more frequently. In this case, the platform also allows you to control how you get paid. Has the thought of possibly having to chase down tenants for monthly rent or having to go through the painful process of evicting them ever crossed your mind? Hosting on Airbnb requires guests to pay before their stay, guaranteeing your rental income. You may also set up cancellation fees and terms that provide additional income and protection for your rental properties.

Flexibility

With Airbnb, you are in control of when your property is available for rent. As a host, you can block off dates on your Airbnb calendar that become unavailable to any potential renters. For example, if you were leaving town on vacation and didn’t want to worry about renters in your property while you are gone, you could block off those dates for peace of mind. Another situation might occur where the property runs into a significant issue that needs repairing, but you would like to wait a couple of weeks to pay for the repairs.

Profitability

When leasing a rental property to a long-term tenant, the monthly rental payment is typically locked in at a specific rate that doesn’t reflect the seasonal activity. When listing on Airbnb, the host is usually able to charge more on a nightly basis. Based on the specific property and its location, it is possible to charge more per night during a busy season or a high-demand location. With the fluctuation of pricing available and the opportunity for longer or shorter stays, Airbnb could easily be more profitable than the traditional long-term renter.

Other platforms allow you to rent your investment property as a vacation rental. Vrbo, which stands for Vacation Rental By Owner, has been around since 1995 and allows individuals to post their entire homes for rent via their website or app. Booking.com was founded in 1996. It offers accommodations that include hotels, apartments, homes, and other unique stays around the world.

Rules for Using Airbnb for 1031 Exchange Properties

There are two possible ways to utilize a 1031 Exchange while also using Airbnb to rent the property. You already own a property that you are renting through Airbnb that you would like to sell, or you are looking to purchase a rental property. Either way, the key with a rental property that you would like to rent on Airbnb is the intent to hold the property for investment use.

When deciding whether or not a vacation home, such as one hosted on Airbnb, qualifies for a 1031 Exchange, here are a few rules to follow:

  • Relinquished property is owned by the taxpayer for at least 24 months immediately prior to the exchange
  • Within each of the two 12-month periods prior to the sale/exchange, the taxpayer rents the property to a third party at fair market rental rates for at least 14 days or more
  • Within each of the two 12-month periods prior to the sale/exchange, the taxpayer’s personal use of the property does not exceed the greater of 14 days or 10% of the number of days that the property is rented

Midland 1031 is a qualified intermediary and has handled all types of 1031 Exchanges. We have two Certified Exchange Specialists® on staff. If you have any questions about 1031 Exchanges and rental properties, please contact us today!