Tax strategy for unused vacation home

Convert to rental, then 1031 exchange to reap benefits

Mike and Claudia McIntosh have not spent one night in their mountain cabin in 2010. One of their sons was married in June; Claudia’s family held a reunion in Michigan in late July; and Mike plans to take time off from work to move his mother into a retirement home in August, so there has been no time to get to the cabin.

"We’ve heard for years about people who don’t use their second home, and now we are those people," Mike said. "I think we would probably sell the place, but we always stop ourselves when we think about paying a capital gains tax on the place."

One viable option is to convert the cabin to investment property status, rent it out for a couple of years and then sell it via a 1031 tax-free exchange to acquire another investment property closer to home that could produce a monthly cash flow, supplementing household income. The new property could ultimately be placed in the couple’s estate or in a charitable trust.