Beyond the 1031: How a Single Mom Used the "Lazy Exchange" to Build Wealth
The Challenge
Following a divorce, a high-earning professional needed to simplify her life. She decided to sell a long-term rental property she had held for years. After closing costs and depreciation recapture, the sale triggered a taxable capital gain of $104,500.
Her attorney suggested a traditional 1031 Exchange to defer the tax. However, she was juggling a full-time career and a young child. The strict IRS requirement to identify a new property within 45 days created pressure she didn't need . She risked failing the exchange and getting hit with a ~$25,000 tax bill immediately.
The Solution
We advised the client to skip the rigid 1031 Exchange and instead execute a "Lazy 1031" combined with the Short-Term Rental (STR) Loophole.
The "Lazy 1031" (Freedom of Timeline): She sold her old property in February and kept the cash. She took her time finding the right investment, eventually closing on a lakefront vacation rental for $845,000 in October of the same year. This gave her 8 months of breathing room, impossible under standard 1031 rules .
The STR Loophole (Active Status): We advised her to list the new property on Airbnb with an average stay of 7 days or less. By self-managing the booking and cleaning coordination for just 100 hours (and more time than anyone else), she bypassed the "Passive Loss" rules .
Cost Segregation & Bonus Depreciation: We performed a Cost Segregation study on the new $845,000 asset. The engineering report reclassified 26% of the purchase price (driveway, appliances, specialty plumbing) into 5-year and 15-year assets , allowing for immediate bonus depreciation .
The Result
The strategy generated a total non-passive paper loss of $228,450 in Year 1.
* Capital Gain Erased: The first $104,500 of this loss completely offset the gain from her old property sale. * W-2 Tax Slashed: The remaining $123,950 flowed over to offset her high W-2 salary.
Instead of writing a check to the IRS, the client received a federal tax refund of $34,800, effectively paying her to upgrade her portfolio.