TM 1031 Exchange
Bookmark us!

Click Here. to receive free copies of our newspaper articles.

How long should a property be held
to qualify for 1031 Exchange tax deferral?

One of the most frequently asked a question regarding 1031 exchanges is how long the investor should hold their property to qualify for an exchange. Key to understanding the answer to this question is that the intent of the exchanger must be to hold the property for investment or use in a trade or business.

The IRS is clear on what does not qualify for a 1031 Exchange regardless of the holding period. This includes properties sold by dealers who hold property for sale and not for investment, and properties sold by investor's who flip them, owning them long enough to resell for a profit

The holding time is a clear demonstration of intent, the longer the investor holds the property, the better. An investor with the ability to provide two years' tax returns showing rental income, expenses, and depreciation has proven to be a good indication of intent to hold property for investment purposes.

The outcome of many court cases suggests that two years of tax returns are a good indicator of intent. The IRS recognizes these court cases but is more likely to audit a 1031 exchange where the property was held for less than a year and a day.

The issue here is not only the number of tax returns filed but also how long the property was actually held. Theoretically an investor could buy a property on December 31 of one year and sell it on January 1 of the next year holding the property for all of one day. It's true the investor could file two years of tax returns but the intent could be seriously questioned based upon the actual time the property was held.

While investor's holding periods of less than a year have held up in court, the investor had the costly expense of going to court to defend their position. Some experts like to point to these cases as validating short term holds. However, the same experts frequently fail to point out that these cases generally fail, and neglect to mention the amount of time and money it took to litigate the investor's point of view.

Most tax advisors will recommend that an exchanger hold the property for at least a year and a day to demonstrate intent. An investor should discuss in detail the holding period of an investment with their tax advisors when a 1031 exchange is part of its investment strategy.

Top of Page