The Mystery of the 1031 Holding Period

 

Is there a holding period for property involved in a 1031 Exchange?

This may be the single-most asked question we hear in the 1031 Exchange business. Exchangers have a suspicion that there’s a “holding period” requirement for exchanges – meaning, that they have to “hold” (own) a property for a certain time period before or after doing an exchange, in order to qualify. In truth, these people are both right and wrong.

They’re right in that the amount of time a property is owned – both the Old (or Relinquished) Property and the New (or Replacement) Property - is a major factor in determining whether a property qualifies for exchange.

However, they’re wrong in thinking that the issue comes down to an official time period.

The determining factor is really the intent of the exchanger to use the property for investment or business purposes. Which really means that at the time an exchanger buys a property, they should not intend to sell the Property, or to move into the property as a residence, in the foreseeable future. Time is simply evidence of this intent.

But, who buys property without ever intending to sell it?! The law is very confusing and often contradictory on this issue, but a few guidelines will give you a better chance of surviving an audit of the exchange.

First, never give any indication – in your records or by telling someone else – that you ever intend to sell or move into the Property at the time you acquire it. Second, even though there is no official holding period, you should still hold a property for at least one year and one day before you try to exchange it (or after you exchange into it). The longer you hold your Property as an investment, the better. If you sell or move into a property within a year of an exchange, be prepared to explain why this was not your original intent when you bought it. Finally, be sure you work with an intermediary, and with your own legal and financial advisors, to help you resolve any holding period questions in an exchange.

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