1031 exchange in less than a year

8 Replies

Hello BP Friends, Can we do a 1031 exchange on an investment property we bought 9 months ago? Is there a tax implication? What are the things we should be aware of when performing a 1031 exchange? Please educate.

 TLDR: yes, get your cpa on board, try to avoid it if you can  


I BELIEVE there is a safe harbor at 1 year. Barring a really good reason I would try to hang on 30 more days before listing, and then selling in 60 days. Has this been leased out and used as investment property? Is there a tenant with a lease in it? Hopefully you didn’t just finish a rehab and never rented it as that would look more like a flip. You can get away with that occasionally by accident, with a good reason, but why not wait the 30 days for the safe harbor? No reason to get yourself labeled a “dealer” snd face the added taxes. 


I'm running into this right now. I purchased a property, then found a better deal and sold the original property, all within a year. The intention was to buy and hold, but I sold it. I did a 1031 because my purpose was to hold. Hoping it holds up.

Originally posted by @Jonathan Pavkov :

I'm running into this right now. I purchased a property, then found a better deal and sold the original property, all within a year. The intention was to buy and hold, but I sold it. I did a 1031 because my purpose was to hold. Hoping it holds up.

 I think people put way too much faith in believing the "intention to hold" satisfies the requirements. "Finding a better deal" is not a good argument for change of intention. If that was true, every flipper could just exchange their properties and claim a better deal came along. The trouble is that the holding period is really the main thing that defines intent per the IRS. The IRS has published guidance that states 24 months is the safe holding period at which they will not challenge. 

https://www.irs.gov/pub/irs-dr...

Some people feel one year is sufficient, because it is the defining point between short term and long term capital gains. There is an argument the asset was held long term for investment at that point. Under a year is considered high risk, because the IRS chose not to even say 12 months was sufficient safe harbor. 

Of course it is only a problem if you are audited or if the exchange ends up flagging you for audit. One thing worth considering is the political climate around real estate loopholes and the current administrations plans to increase IRS staff to increase the number of audits. I would be more cautious looking forward.

Originally posted by @Loga Siva :

Hello BP Friends, Can we do a 1031 exchange on an investment property we bought 9 months ago? Is there a tax implication? What are the things we should be aware of when performing a 1031 exchange? Please educate.

My CPA told me this. You can do a 1031 exchange on a property that you "intended to keep as a rental". So you couldn't 1031 a flip. As to how they figure out that criteria, its a bit grey. 

@Steven Wilson , Exactly correct.  And it is very flexible and gray how you demonstrate that intent.  You can use

1. The actual time you owned the property.

2. The way you actually used the property 

3. your past history and current practice

4. correspondence you may have had with people about what you intended

5. An unsolicited offer to purchase

6. Other situation specific items that would cause you to change your intent from long term to short term (one of my clients had a bear take up residence at the trash can so he decided to sell early and 1031!!)

Originally posted by @Dave Foster :

@Steven Wilson, Exactly correct.  And it is very flexible and gray how you demonstrate that intent.  You can use

1. The actual time you owned the property.

2. The way you actually used the property 

3. your past history and current practice

4. correspondence you may have had with people about what you intended

5. An unsolicited offer to purchase

6. Other situation specific items that would cause you to change your intent from long term to short term (one of my clients had a bear take up residence at the trash can so he decided to sell early and 1031!!)

Dave do you know if you can take any money from a 1031 sale? or does everything have to go towards the new property, profits, equity, etc?

 

@Steven Wilson , The requirement to defer all tax is that you must purchase at least as much as you sell and that you use all of the proceeds to do that.

You can purchase less than you sell.  And you can take cash.  But the difference is treated as profit by the IRS so you pay tax on that amount or the difference between your sale and purchase.  Sometimes this can be a very good plan as you take the cash you need for whatever and pay some tax.  But the 1031 shelters the rest of the gain from tax.