Now that the sales of Real Estate have ticked up, the question becomes can I 1031 Exchange new properties held less than one year? The big question the IRS asks is intent. What was your intent with the property and do you intend to make this a long term hold? Unfortunately for us, the IRS does not tell us exactly how long to hold a property to qualify for 1031 exchange treatment. The one thing the IRS does tell us is that they do not like property to be exchange if it was held for resale. So basically they are saying if you buy a piece of property and you put a sign up in the front yard, this will not qualify and then you buy another property and flip that one.
Again it goes back to intent. If properties are held for speculation they can qualify for 1031 exchange treatment. So if I buy a property on foreclosure and fix it up (which takes 3 months), and then I list it and sell it, and I want to buy a long term rental, can I do a 1031? I have double my money on the sale of the foreclosure, and my intent is to keep my money in real estate. Again the answer is grey but I would consider discussing an exchange as long as the client holds the property long term. I would say long term is at least 2 years.
The reason I say long term is 2 years plus, is that there is a recent Revenue Procedure discussing holding property for 2 years. That make me think that is what the IRS is thinking. Typically if your property fits perfectly into the 1031 box (say a pure rental), I would say 1 years is long enough to hold a property for an exchange, again along as your intent is to stay in real estate and not cash out.
Dave Owens, CPA, CES is the owner of AdvantaIRA Trust, LLC and 1031 Tax Free Strategies, LLC. His website is www.AdvantaIRA.com. Feel free to contact us with any questions at 239.333.1031.