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The
'Year-and-a-Day' Rule:
Great
advice, but it's not The Law
Recently
we encountered a great deal of confusion
concerning 1031 Exchanges and the so-called "year-and-a-day"
rule. You've probably heard that you should hold both
your Old and New Properties for at least a year-and-a-day
prior to and after completing a 1031 Exchange -- and
this remains sound advice.
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by
Curtis Moore, Esq., consultant with The
1031 Exchange Experts |
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However
(and this is a HUGE "however") THE "YEAR-AND-A-DAY
RULE" IS NOT THE LAW. Nowhere in Section 1031,
the regulations, tax court decisions, or any other
authority will you find any mention of a "year-and-a-day" rule.
The "year-and-a-day"
rule is only a guideline divined from a few Tax Court
decisions, a non-binding IRS ruling stating that holding
property for at least two years in a particular instance
was fine, and common sense considerations - for instance,
long-term capital gains kick-in after holding property
for a year.
Here is a short summary of the law. Section 1031 says
that you cannot perform an Exchange with Property held
"primarily for sale." Several Tax Court decisions interpreting
this language have made the determination that if,
at the time of closing the purchase of either your Old
or New Property, you do not have a then-present intent
to resell such Property, your exchange is valid.
So in theory, if the next day you legitimately change
your mind, your exchange should still stand (though
the IRS would justifiably be skeptical!)
We have typically found that if you hold property for
over a year, the IRS is less likely to question the
your motivation in entering into the Exchange. However,
if the Property has been held for less than a year,
the IRS may want to know why you held it for such a
short period. You may have to prove to the IRS some
kind of change of circumstances -- job relocation, family
illness or death, an unsolicited offer to purchase the
Property (and you never listed it for sale), or other
reasons why you changed your mind.
The
"year-and-a-day" rule is still very sound advice. However,
don't let anyone tell you that your exchange is invalid
just because you've held your Property for less than
a year - without analyzing the details of your situation.
The fact that you held your Property for less than a
year is not automatic evidence that your Exchange will
fail -- it is merely one piece of your larger financial
picture.
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