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Holding Requirement For 1031 Exchange Properties
| | Monday, June 14, 2004 @ 12:00 AM EDT
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Contributed by: William Exeter
William Exeter Properties
Read more archived articles about Tax Strategies
One of the most frequently asked questions is how long does a taxpayer need to HOLD his or her relinquished property before selling and doing a 1031 exchange and/or how long does he or she need to HOLD the replacement property after doing a 1031 exchange.
This is not an easy question to answer. Department of the Treasury Regulations and Rulings make it very clear that the taxpayer must have the INTENT to HOLD property for rental, investment
or use in a business. However, how to prove the taxpayer's INTENT to HOLD property is not defined. Therein lies the problem. So, how long must a taxpayer HOLD title to a property to demonstrate INTENT?
The amount of time a taxpayer HOLDS the property plays an important role in demonstrating INTENT. The easiest way to demonstrate the INTENT to HOLD is to do just that - HOLD it. The longer you HOLD the property the stronger your case (argument) for INTENT will be.
Tax advisors frequently recommend that taxpayers HOLD property for at least one (1) year. The taxpayer will have little difficulty proving INTENT with a one (1) year HOLDING period. He or she will mostly likely have two (2) income tax returns listing rental income, expenses and depreciation, which provides a great case in favor of INTENT to HOLD.
It is also clear that if you are considered a dealer you will not qualify for 1031 exchange treatment because you are technically HOLDING property for sale (inventory) and not for investment purposes. Similarly, if your INTENT is to buy, fix up and then sell (flip) property you clearly do not have the INTENT to HOLD and will not qualify for 1031 exchange treatment.
Having said all of that, only the taxpayer can determine how aggressive or conservative he or she wants to be. The longer a taxpayer HOLDS the property the more conservative he or she is being and the easier it is to prove INTENT to HOLD. The shorter the HOLDING period the more aggressive the taxpayer is being and the more difficult it is to demonstrate INTENT to HOLD.
Note: The 1031 in 1031 Like Kind Exchanges refers to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations.
Mr. Exeter has been a senior executive in the 1031 exchange industry since 1986 and has written and lectured extensively on tax-deferred, like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code. He has administered in excess of 50,000 1031 exchange transactions during his career.
You can contact Mr. Exeter here
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