1031 Exchange Basics for Destin Investors

Selling a Destin rental and staring down a big tax bill? You are not alone. Many local investors want to grow their portfolio without losing momentum to capital gains and depreciation recapture. The 1031 like-kind exchange can help you defer those taxes while you reposition into a better property or even multiple properties. In this guide, you will learn the rules, timelines, local Destin considerations, and clear steps to plan with confidence. Let’s dive in.

What a 1031 exchange is

A 1031 exchange lets you sell investment or business real estate and reinvest in other like-kind real property while deferring federal capital gains tax and depreciation recapture. After 2018, only real property qualifies, not personal property. The tax is deferred, not eliminated, and it becomes due if you sell the replacement property outside a future 1031 exchange. You document the exchange and report it with Form 8824 when you file your federal taxes.

Key timelines that matter

Two deadlines drive every exchange. You have 45 days from the sale of your relinquished property to identify replacement options in writing to your qualified intermediary. You must close on your replacement property within 180 days of that same sale date, or by your tax filing due date for that year if it comes earlier. These windows run at the same time, so plan for 45 and 180 days concurrently.

Like-kind property rules

For real property, most U.S. real estate is like-kind to other U.S. real estate. You can exchange a Destin rental condo for a commercial building, raw land, or another rental. U.S. property and foreign property are not like-kind to each other. Personal-use homes generally do not qualify unless the property has truly been held for investment or business use under IRS guidelines.

How a Destin exchange works

Step-by-step process

• Engage a qualified intermediary before you go under contract to sell.
• Close the sale, and have the proceeds go directly to the qualified intermediary.
• Identify replacement property in writing within 45 days.
• Close on the replacement property within 180 days.
• File Form 8824 with your tax return and keep thorough records.

Identification rules that qualify

• Three-property rule: name up to three properties of any value.
• 200 percent rule: name any number of properties as long as their total value does not exceed 200 percent of what you sold.
• 95 percent exception: if you identify more than 200 percent, you must acquire 95 percent of the total identified value.

Exchange types to know

• Deferred exchange: sell first, buy later. This is the most common.
• Reverse exchange: buy the replacement first, then sell. This uses a holding entity and is more complex.
• Improvement exchange: add improvements before you take title, within strict timelines.
• Fractional options: Tenancy-in-Common and Delaware Statutory Trusts can provide diversification and more passive ownership with professional management.

Your qualified intermediary

A qualified intermediary is required to hold the proceeds and prepare exchange documents. The QI must be independent from you and not a related party or recent agent. Choose a reputable firm with experience, insurance, and references, and consider members of the Federation of Exchange Accommodators.

Taxes to understand

Boot and mortgage boot

Cash you receive or a reduction in debt can create taxable boot. For example, if you had a $500,000 mortgage on the property you sold and only $300,000 on the replacement, that $200,000 difference can be taxable unless you add new debt or cash to bridge the gap. Plan ahead to match or replace debt to avoid surprises.

Depreciation recapture and basis

Depreciation you claimed in the past is deferred in a 1031 exchange but is generally recaptured when you later sell outside an exchange. The basis of your replacement property carries over from the property you sold, adjusted for any added cash or boot. Accurate basis tracking matters for future depreciation and gain calculations.

Related-party restrictions

Exchanges involving family members or entities you control have special rules. In many cases, the related party must hold the property for at least two years for the exchange to be respected. Get advice before structuring any related-party transaction.

Destin-specific factors

Short-term rental rules and taxes

Okaloosa County and the City of Destin have registration requirements and collect transient rental taxes. If you operate a short-term rental, you must register and remit applicable local transient taxes and state sales tax. Zoning, parking, occupancy limits, and noise rules can vary by area, so verify compliance before you identify a replacement property meant for short-term rentals.

Insurance and flood risk

Coastal properties in Destin face hurricane, storm surge, and flood exposure. Flood insurance is commonly required and premiums can affect cash flow. FEMA flood maps and changing risk profiles can influence future costs and insurability, so obtain a flood zone determination and insurance quotes early in the identification period.

Florida transfer and property taxes

Florida has no state personal income tax, which can make tax deferral more impactful for some investors. You should still expect documentary stamp taxes on deeds, recording fees, and potential intangible taxes at closing. Property tax rates vary within Okaloosa County, so review assessments and millage for your target properties.

Seasonality and bookings

Destin’s vacation market is seasonal, and many sellers have future guest reservations on the calendar. If you are exchanging a short-term rental, coordinate closing dates and reservation transfers carefully so you do not disrupt guest stays or cash flow. Timing can also help you preview peak-season performance on your replacement options.

Smart strategies for investors

• Match or exceed your relinquished debt level with new financing or added cash to reduce mortgage boot.
• Diversify by exchanging into more than one property or consider a DST for passive ownership and professional management.
• Confirm investment intent and document rental activity, especially when a property has any personal use history. IRS safe-harbor guidance outlines factors that support investment use.
• Build realistic pro formas that include insurance premiums, potential flood costs, transient taxes, and local compliance fees.

Your pre-sale checklist

• Consult a tax advisor who knows 1031 exchanges and Florida real estate.
• Select a qualified intermediary before you list or go under contract.
• Confirm the property you are selling has been held for investment or business use and organize rental records.
• Review mortgages and plan financing to avoid mortgage boot.
• Map your identification strategy and replacement targets well ahead of day 45.
• For replacement properties, verify zoning, short-term rental rules, and tax registration requirements.
• Order flood determinations and obtain insurance quotes.
• Budget closing costs, documentary stamp taxes, and recording fees.
• Keep all exchange documents, assignments, and closing statements for your files.
• File Form 8824 with your federal tax return for the exchange year.

Avoid these pitfalls

• Waiting to hire a qualified intermediary until after closing.
• Missing the 45-day identification or 180-day exchange deadline.
• Taking possession of proceeds even briefly, which can disqualify the exchange.
• Vague or incorrect property identifications that do not meet IRS standards.
• Underestimating local costs like insurance, flood coverage, and transient taxes.
• Entering related-party deals without meeting the required holding periods.

Your local team matters

A well-run exchange needs the right experts. Your team should include a tax advisor or CPA with 1031 experience, a qualified intermediary, a Florida real estate attorney when needed, an exchange-savvy title company, and a coastal insurance broker. As local brokers focused on Destin and 30A, we can help you source and evaluate replacement properties that fit both lifestyle and income goals, and our integrated rental arm, Coastal Blue Vacations, can provide a turnkey owner-to-host transition when your strategy involves short-term rentals.

Ready to plan your exchange

If you are considering a 1031 exchange in Destin or along 30A, let’s talk through timing, property fit, and your rental strategy. We will help you map a clear path from sale to identification to closing so you can defer taxes and upgrade your portfolio. Start your coastal plan with the Bellville Team.

FAQs

Can I 1031-exchange a Destin vacation rental?

• Yes, if it is held for investment or business use, with rental activity and timing that demonstrate investment intent.

Are DSTs or TICs allowed as replacement property?

• Yes, Delaware Statutory Trusts and Tenancy-in-Common interests are common replacement options for diversification and more passive ownership.

Do I have to stay in Florida for my replacement property?

• No, your replacement must be U.S. real property, and you can buy anywhere in the United States.

Will a 1031 exchange eliminate taxes forever?

• No, it defers taxes; selling the replacement property outside a 1031 usually triggers the deferred gain and depreciation recapture.

What if I miss the 45- or 180-day deadline?

• Missing either deadline generally disqualifies the exchange and the sale becomes taxable for that year.

What local taxes apply to Destin short-term rentals?

• Expect transient occupancy taxes and state sales tax, plus required registration and timely remittance to local authorities.