Intent Question Qualifying for a 1031 Exchange

3 Replies

Hi all, I have a question about intent on the property being sold in a 1031. I received a property from my grandparents (sold on deed for $1) in September 2020. They owned the house with no mortgage. The plan was to use it as a rental property after grandparents passed away - they were still living in the house and very sick and it was a matter of time before they passed.

Grandma died in the house (shot by grandpa), then grandpa passed shortly after that. After that I wanted nothing to do with that house and plan to sell it and use the money to buy a new property to use as a rental.

Since it was never actually rented to anyone, but the intent was to use it as a rental, and no one has lived in the home since December - would this qualify for a 1031 exchange if I sell it and buy a new property to rent? I want to make sure I get this right for my taxes. Thanks!

Hi @Dan Snyder

Clearly your intent was to rent the property upon your grandparents passing.  You need to make sure that you follow through with this intent.  Report it as investment property on your 2020 tax return and for the first part of 2021.  List it as investment property on any loan applications, financial statements, etc.  You need to report it, file it and treat it as investment property in order to demonstrate your intent to hold for investment purposes should be you be audited.  The shorter the holding period as investment property the more difficult it is to prove intent.  It is easier to demonstrate intent if you have actually rented it out, but it does not have to be rented nor generate cash flow as long as it is held for investment purposes.  You also have a good reason for selling early, not renting, etc., so your position statement is that you repositioned in other rental property due to what happened with your grandparents. 

@Dan Snyder , There is no statutory holding period or requirement for actual revenue generation.  The standard is your intent.   And honestly I'm hurting for you and don't blame you one bit for wanting to get past that and the memories.  No one can guarantee your exchange.  But if for no other reason than your mental health I'd sell right now, do a 1031 and move on.  You'll feel better.  I really doubt you'll ever have any issues with the lack of income or holding period.   But if so your extenuating circumstances are very compelling.  

Time for a fresh start.  

@Dan Snyder very sorry to hear about the circumstances surrounding the property. You're asking a good question about a relatively subjective part of the tax code.  

The IRS, of course, doesn't frequently dive into the storyline. As sympathetic as everyone on BP is, you should follow the advice that @Bill Exeter gives here: List the property as an investment on your 2020 returns. Treat it as such moving forward in any documentation. This shows intent. 

My guess here (?) is that you do not have a track record of buying real estate and selling it shortly thereafter with great frequency.  The IRS will sometimes look to your past investment pattern when determining intent. 

Beyond those considerations -- unless we are missing other salient facts -- I would advise continuing down the 1031 road.