Holdtime before 1031 exchange?

Question

Hello fellow BP'rs!

I have been trying to find concrete info on laws...but it seems to be a grey area?  I acquired a new unit and I'm now looking at a 1031 exchange of a portfolio (5 units, commercial financing) into something much larger.  How long do I have to "season" the latest purchase before I can exchange into a larger portfolio?  And...would anyone like to share their story on "flipping" their smaller portfolio into a larger one in record time?  :)

Thank you kindly!

Lauren

Drew Reynolds · Answer

I'm sure the QI's can weigh in here, but generally speaking it has to do with intent, not so much with time that the asset was held.  Properties held primarily for resale also do not meet the requirements for a 1031 exchange. - example include “fix-and-flip” homes and land development (land subdivided and sold off as individual lots).  However, if it were your intent to hold it longer term, then you may be eligible - consult your attorney and tax advisor as you likely need to establish that intent.

Steven Hickox · Answer

Dear Laren:  I have been a QI for 23 years now and Drew is exactly right.  There is no holding period in a 1031x.  Instead the relinquished property and the replacement property must both be "held for investment."  And the investment intent is measured at the time of purchase.   Of course rapid resale of a property is one indication that you did NOT hold it for investment, but there are other facts that can rebut this.

Lauren Heart · Answer

Great information!  Thanks Dave.  I appreciate the helpful and personal insight.

Dave Foster · Answer

@Lauren Heart, The issue and use  of the word "intent" as the standard has been discussed very well.  You must be able to demonstrate your intent in purchasing that last property as being to "hold for productive use in business,for trade, or for investment."  A different way of looking at it might give you some more perspective and insight.  If your intent in the purchase was primarily to resell then that would make that property "inventory" and not be eligible for1031 treatment.

So how would you demonstrate that you did not buy the property primarily to resell?  Well the obvious way is if you didn't immediately resell.  Without a holding period it's a moving target of all the factors.  But all other things aside, most professionals feel comfortable at anything more than a year (there's case law and accounting practice reasons for that) with the caveat that your personal situation may be such that 1 year may still not be long enough.  Or that there may be specifics to your circumstance that make less than a year OK.

Some of those factors which you have to look in the mirror and discuss are - actual length of time held, past history, current practice, documents like emails and discussions with your professionals, the reason for selling - like the need to change geography or an unsolicited offer to purchase, or a contract price that meets your stated long term appreciation goals.

It's not a question of what is OK.  It's a question of what is true or not.  If you can look in the mirror and answer the intent question then you'll have documentation.

Drew Reynolds · Answer

On the exchange side (assuming proper establishment of intent) then are not many limitations as far as what you may exchange into.  Just needs to be "like-kind" which simply means property held for investment.  You can exchange 1 property into 20 or 5 properties into 2, SFRs into land, retail into hotel, or even DST/TIC into sole-ownership (or vice versa), etc. etc. as long as both the relinquished property(ies) and the replacement property(ies) are held for investment, it is the same taxpayer/legal entity buying and selling the properties and your trade balances.

Lauren Heart · Answer

Thank you Steven!  Basically I'm looking to roll a small commercial portfolio that is out of state, into a larger portfolio closer to where I live.  I'm anxious to own property closer to me and was wondering how long before I can achieve that goal!  Thank you for your help!

Lauren Heart · Answer

Thanks Drew!  The properties have always been B&H, some owned for years and entirely as investments.  The new unit is for the same purpose, only to roll a smaller portfolio into another larger investment by way of 1031.  (None are flips, bad usage of language on my part, I should have said "quick exchange" instead of flipping. ;)  Thanks for responding.

Holdtime before 1031 exchange?

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