1031 exchange, on the fence

5 Replies

I would like to hear from the experts on this one; here is my story. In January of this year I closed on a house with a buy and hold strategy. I did an HML and then into a conventional loan, I rented the house and am now in the process of evicting the current tenant. During the process I realized that I may have purchased a house that is above the current market demand and I will not get the type of tenants I want for the rent that I need; chalk that up to experience. Anyway, so in my current situation of only having the house for six months but with obvious intent to hold on to it initially should I consider moving forward with a 1031 exchange; would I qualify?

You will not. The rule is you need to own the property for 1 year from day of closing. Also remember that for a 1031 you have 45 days from the sale of the property to list 3 properties you are looking at buying (you cannot alter the 3 or you will not qualify). You then have 180 days to close on the deal or pay the taxes.

Originally posted by @David Chwaszczewski :

You will not. The rule is you need to own the property for 1 year from day of closing. Also remember that for a 1031 you have 45 days from the sale of the property to list 3 properties you are looking at buying (you cannot alter the 3 or you will not qualify). You then have 180 days to close on the deal or pay the taxes.

David,

This is not true.  The Treasury Regulations only require that the taxpayer have the intent to hold for rental or investment or business use.  There is absolutely no holding period required.  The majority of advisors and experts recommend a holding period of at least 12 months, but there is no written requirement to do so.  The issue is if you get audited can you demonstrate that you had the intent to hold, which I think in this case he can.  And, he has a good economic/business reason for completing another 1031 Exchange as well.

Also, you have referred to the three (3) property Identification Rule, but there are two other rules that taxpayers can use as well: 200% FMV Rule and 95% Exception Rule.

Bill,

Thanks for your post. I had a property looked into the 1031 and that was the information i was given (from an advisor). I will now have to revisit this again and see if it will work. I guess like going to the auto mechanic i should have got a second opinion.

The one year as mentioned is a guideline. Don't believe your advisor as the gospel and all knowing.

Trust but verify.

Yep, that's the challenge in the 1031 Exchange world.  The Tax Code and Treasury Regulations leave a lot of issues open for interpretation, which creates lots of gray areas.  There are many people who state that you must hold the property for at least 12 months, but this is simply not true.  You merely have to prove that you had the intent to hold for rental, investment or use in a business.  The longer the holding period is just one way to help support your intent.

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