How long do you have to hold property for 1031 exchange?

Question

What is the minimum holding period required for a property to qualify for a 1031 exchange, and what factors determine whether a property is considered "held for investment" under IRS guidelines?

ARTE's Answer

The question of how long you need to hold a property to qualify for a 1031 exchange is a common one, and it's important to understand that the IRS does not specify a strict holding period. Instead, the focus is on the intent behind holding the property. According to IRC §1031, the property must be “held for productive use in a trade or business or for investment.” This means that the intent at the time of purchase and throughout the holding period is crucial.

While there is no explicit holding period mandated by the IRS, there are some guidelines and interpretations that can help you determine a reasonable timeframe. For instance, a private letter ruling (PLR 8429039) suggested that a two-year holding period might be sufficient to demonstrate investment intent. However, this is not a legal precedent for all investors. Many advisors recommend holding the property for at least 12 months, as this allows the property to be reflected as an investment in two tax filing years. This recommendation is partly based on a 1989 congressional proposal for a one-year holding period, which, although never enacted, is considered a reasonable minimum guideline by some.

The key factor is the taxpayer’s intent to hold the property for investment purposes. The IRS will look at all facts and circumstances surrounding the acquisition, holding, and sale of the property to determine if the intent was indeed for investment. If the property was acquired with the intent to quickly resell for a profit, it may not qualify for a 1031 exchange.

Let’s consider an example to illustrate this:

Imagine you purchase a rental property with the intent to hold it for investment. You rent it out for 18 months, during which time you maintain records of rental income, expenses, and any improvements made to the property. Your intent is clear: you are holding the property for investment purposes. After 18 months, you decide to sell the property and use the proceeds to acquire a larger rental property.

At Deferred.com, we can facilitate this transaction as your qualified intermediary. By using our “No Fee Exchange” service, you can save money while ensuring compliance with 1031 exchange requirements. We will help you navigate the process, ensuring that the relinquished property is sold and the replacement property is acquired within the necessary timelines (45 days to identify and 180 days to close on the replacement property).

In this scenario, your 18-month holding period, combined with the documented intent to hold the property for investment, should support the qualification for a 1031 exchange. The use of Deferred.com as your qualified intermediary ensures that the transaction is structured correctly, allowing you to defer capital gains taxes and reinvest the full proceeds into your new investment property.

Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.

Deferred's AI Real Estate Tax Expert (ARTE) is a free research tool. Trained on 8,000+ pages of US tax law, regulations and rulings, ARTE outperforms human test takers on the CPA exam. This is page has ARTE's response to a common 1031 Exchange question and should not be considered personalized tax advice.

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