How long must I own a property before I 1031 it?

Question

Is there a time limit on how long I must have owned a property, before I can sell it and 1031 exchange the proceeds into something bigger? If so, how long?

Bill Exeter · Answer

Yes, we have been involved in many expert witness cases where the intent to hold has been tested.  The amount of time is not the issue, the intent to hold is the issue.  The question is: Did the investor have the intent to hold for investment, or did they have the intent to hold for sale (i.e. inventory in a real estate business such as fixers/flippers). If it was held for investment, then it will qualify, if it was held for sale, it won't.  There is obviously lots of room for interpretation here, so an investor must decide how aggressive or conservative they wish to be.

Dave Toelkes · Answer

It would appear from the form and substance of your transaction that your primary intent was to rehab and resell.  You state that the only reason you did not do the rehab was that your total investment after rehab would be greater than the ARV.  When you did not rehab, you sold.  You appear to have entered this transaction with a profit motive, not for the production of an income stream. Rental property owners don't buy a property, they buy the cash flow the property generates.   If I were an IRS auditor, I would find if very difficult to believe your primary intent for the acquisition was to hold for rental use.

Scott Anthony · Answer

Thanks for the input, I'm not sure I feel Lucky enough to risk it, considering my potential gain will be small, so I think I will just take the tax hit on the capital gain on this one.

Appreciate the input.

David Krulac · Answer

@Scott Anthony

The IRC does not specify a time period to hold, and there are cases all over the board as indicated above.  The same applies to "Dealer Status", IRC does not specify a number of deals that make you a dealer, and there is cases where 1 deal was a dealer and 100 deals was not a dealer.

Both of these questions will only come up if you are audited, but you better prepare your response now while you have time to provide justification.  And that that investor Dirty Harry said, "Do you feel lucky, well do you?"

Scott Anthony · Answer

Originally posted by J  Scott:
	    What was your intent after the rehab?  That's the important question.  Did you intend to rehab and hold and rehab and resell?  Do you have support for that intent?

I intended to rehab, and hold, for renting, possibly Section 8. I don't know that I can actually "prove" that, except for an estimate from a General Contractor, and I researched Section 8, and printed a blank Inspection sheet, so I could share with the Contractor what i was looking for in a rehab.

BTW, everyone's input here has been a big help, I appreciate it.

Thank you.

J Scott · Answer

What was your intent after the rehab?  That's the important question.  Did you intend to rehab and hold and rehab and resell?  Do you have support for that intent?

Clearly, I'm not an expert in this area, but I imagine those are the first set of pertinent questions...

Scott Anthony · Answer

Ok, so if I have this house that I have owned for say 3 - 4 months, but when I bought it my intent was to rehab it. I have found that the cost to rehab may easily be higher than the likely ARV. So, I am not rehabbing it, I am selling it to someone who wants to fix it up themselves. If I keep the Contractors' estimates, wouldn't that be enough to show intent, especially since I don't have any other "inventory"?

Steven Hamilton II · Answer

@Scott Anthony ,

I will second @Bill Exeter.  It depends upon intent.  As long as it was a rental long term or such you can justify that it was investment and not inventory.

So essentially look at facts and circumstances. If you gut rehab a property for a total rehab of 50k on a 100k property and then lease it out for a year, then sell. It will look like inventory most likely. Unless, you can show there was a valid business purpose. I'll give the example of the tenant offered you a price you couldn't refuse. THEN you might get away with it.  But it'll still be hard to do.

-Steven

J Scott · Answer

I've never done one, so no real world experience for me...

Scott Anthony · Answer

Thank you @J  Scott , the article says the holding period is not clearly defined, but the Investor's intent is a big deciding factor. It goes on to cite cases where 1031 exchanges were granted for property held only 5 days, and exchanges were declined for property held for 6 years. Very interesting.

Any experiences where this was tested?

How long must I own a property before I 1031 it?

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