Is 18 Months Long Enough to Satisfy the 1031 Exchange Holding Requirement?

Many taxpayers wonder how long they need to hold their replacement property in order to qualify for 1031 exchange treatment. In this article, we are going to discuss some important considerations when it comes to the 1031 exchange holding period requirement.

How Long is Long Enough to Satisfy the 1031 Exchange Holding Period Requirement?

You could ask four different people this question and you will get four different, potential correct answers. The real answer is - nobody really knows.

Let’s say you purchased a replacement property and you put it into an intermittent rental program (such as AirBnB). The question is – how long does the IRS scrutinize that property after you acquire it to ensure that you’re really using it for investment or business purposes? In the IRS’s own safe-harbor, they examine the two 12-month periods after you acquire the property. So if you extrapolate the two 12-month periods as the standard for rental pools, maybe it stands to reason that 18 months might be a little bit shy of that standard. 

That being said, there is great diversity of opinion on this topic and reasonable people differ on what exactly constitutes an adequate holding period.

Like-Kind Exchanges of Real Estate

If you are looking to defer the capital gains taxes on the sale of real estate, a 1031 exchange might be right for you. Reach out to the qualified intermediaries at CPEC1031, LLC to learn more about the like-kind exchange process and how it may be beneficial to your situation. Our team can walk you through the ins and outs of the 1031 exchange process, making sure you have everything you need when it comes time to close on your transaction. Contact us today at our downtown Minneapolis office to learn more about our services and how we can help!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Holding Periods & The Qualified Purpose Requirement

What if there's a seller that has a lot for sale that they have owned for one year - can they do a 1031 exchange on the sale of that lot?

How Was the Property Held?

The answer to the question really depends on how they have held the property.

If they purchased the lot intending to use it for investment or business purposes then they can probably do the 1031 exchange because they held it for the requisite intent.

However if they bought the lot intending to flip it, holding it primarily for resale, then the IRS could make the argument that the property doesn't qualify for 1031 because it's their inventory.

The Qualified Purpose Question

The real question is has the taxpayer held the property for a qualified purpose?

The longer that you have held it for that qualified purpose the better. The IRS has never mandated or given a bright-line ruling on how long you have to hold your property prior to a 1031 exchange. Because of that ambiguity there is a lot of uncertainty as to how long one has to hold the property.

Sometimes people want to hold it for a year. Sometimes people want to cross over into the next tax year so they have at least one tax return under their belt. Other folks are very conservative and want to hold it for several years before they dispose of it in a 1031 transaction.

• Start Your Exchange: If you have questions about qualifying purpose, the held for requirement, or anything regarding 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Rental Property 1031 Exchange Rules

A client recently came to us with the following 1031 situation:

We have named a property in Edina, which is priced at $450k. We plan to rent it out at the beginning, and move in later. Our question is, how long do we have to rent out the house before we can move in and convert it to our primary residence, without the profit gain penalty?

No Clear Answer

That is a very good question, for which there is not a clear answer.

We know from the Internal Revenue Code that your initial intention (mental state) must be to hold the Replacement Property for productive use in a trade or business or for investment. It is okay to have an “indeterminate” long term intention as to what you may do with it much later. However, I would not say with 100% certainty that you will be able to move in to it as your home at this time.

The Code

26 U.S. Code § 1031 - Exchange of property held for productive use or investment

(a)  Nonrecognition of gain or loss from exchanges solely in kind 

(1)  In general

No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.

Holding Periods

There is not a bright line minimum time period that I can point you to. The safe answer is “The longer…the better.”  Two years of holding it for investment / business purposes may be sufficient for most taxpayers. Check with your CPA or tax adviser about your specific situation.

• Start Your 1031 Exchange: If you have questions about 1031 rental properties and holding periods, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

State of Mind Matters & the 1031 Holding Period

This article is all about the 1031 holding period, which is not really a period but more a state of mind. When you acquire a property in a 1031 exchange, you need to have the proper intention, specifically to hold the property for either investment or for use in a trade or business.

How Long Do I Have To Hold the Property?

Many people ask the following question:

"After, I have completed a 1031 exchange, how long do I have to hold the property?"

The answer depends. If you buy the property and immediately list it for sale and try to unload the property, then it seems apparent to me that you weren’t holding the property for investment because you have immediately listed it for sale. This is more indicative of holding the property primarily for resale. Remember that property that you hold primarily for resale is viewed by the IRS as your inventory (your stock in trade). They don’t allow 1031 exchanges on your inventory. So, if you immediately unload the property, it is not necessarily that you violated a holding period, it is that you violated the intention, the (mental) holding requirement.

What are your Intentions?

As a result, it is essential to consider your intentions when you acquire a property during your 1031 exchange. Here's another hypothetical situation:

• You purchase a property, and after you acquire it, someone comes forward with an unsolicited offer.

• You did not have the property listed for sale - this person just came out of the woodwork and offered you a great deal of money - more than what you paid for it.

In this circumstances, it seems to me that even though you ‘held’ the property for just a short time, you had the proper intention when you acquired it. It doesn’t matter that you disposed of the property shortly after acquiring it. What does matter is that you had the proper intention.

1031 Tip: If you receive an un-solicited offer to purchase your 1031 replacement property, you could write a letter to the purchaser saying the following: “Thank you for your offer. When I acquired the property, I intended to hold it for investment purposes, but your unsolicited offer is persuasive, and maybe we can meet a mutually beneficial result. Maybe I will be persuaded it sell it to you.”

• Start Your 1031 Exchange: If you have questions about going into a 1031 exchange with the proper intentions, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved