How Long Must You Hold a Property for a 1031 Exchange?
For someone who is thinking about selling their real estate property, a 1031 exchange can be the best solution to defer their capital gains taxes.
A 1031 Exchange, also recognized as a Like-Kind Exchange, is a real estate investment strategy that provides you the opportunity of transferring the tax liability of your current property to a newly acquired one. That means if you sell your real estate property and acquire another one using a 1031 exchange, you do not have to pay any federal taxes on gain at the time of sale. The primary and most important condition for a 1031 qualification is that both the relinquished and replacement properties have to be held for investment, not for resale. This means you must have the intention of keeping your investment in real estate, not to sell and cash out.
Now you may wonder, what is the holding period for a property to be qualified for a 1031 exchange? The short answer to this is that there is no finite holding period for a property to be automatically qualified for a 1031 exchange.
Holding Guidelines for 1031 Exchange
While the Department of the Treasury Regulations and numerous rulings make it very clear that you must have the intent to hold your 1031 Exchange property for rental or investment or use in your trade or business, they fail to define exactly how long or over what period of time you need to hold your relinquished properties or replacement properties in order to qualify for a 1031 Exchange.
Why this confusion about the holding period of a 1031 exchange property?
Because there is no definite holding period for a property in a 1031 exchange, this issue is confusing for many exchangers. This confusion largely arises from the fact that neither the IRS nor the regulations provide a comprehensive definition of the phrase “held for investment.”
If you have consulted two or more advisors about the holding period of a property in a 1031 exchange, chances are that you have gotten two different sets of opinions from them. Some advisors believe that the ideal holding period is two years, whereas others think that it is twelve months. The important question is who is right?
It all comes back to the exchanger’s intent
How long a property should be held in a 1031 exchange is not definitive because time is a further reflection of an exchanger’s intent.
What qualifies a property for a 1031 exchange is not how long you have held it—rather, your purpose and intent in holding that property is the most important factor. If you want to use this tax deferral strategy, then both your relinquished and replacement property must be held for productive use–that is, in a trade or business or for investment. For this reason, properties used for personal use or for the intention to cash out by resale are not qualified for a 1031 exchange.
In short, the questions about the holding period for a property in a 1031 exchange always come back to your intent on holding that property. You, along with your advisor, should be able to substantiate that both your relinquished and replacement properties are held for productive use and that you intend on keeping your investment in real estate inside the United States. If you can do that, the minimum holding period for a property in a 1031 exchange should be quite flexible.
If you have any more questions about trading your investment property in a 1031 Exchange, complete the form below for a free consultation: