1031 Information? Any restrictions?

Question

Are there any restrictions on how long you have to hold a property to 1031 it?  I have had a property for 11 months now that has appreciated about 15% and would like to try to get out of it and was wondering if there were any rules against this.  Thank you!

Dave Foster · Answer

@Brian Heimerdinger, you're certainly within a good window to evaluate that property for whether you want to keep or sell.  By the time you sell you will almost surely have crossed a year anniversary.  Many people feel comfortable with that length of time - primarily because that puts income and expenses on two different tax reporting years.  As long as your intent was to hold and you're now re-evaluating.

But as you're thinking about it you'll want to see what that 15% appreciation actually means.  If there's other reasons to sell that's one thing.  But a sale on a 15% appreciated house probably isn't going to turn into much of a net gain at all by the time you consider commissions, closing costs, borrowing costs of this property and the next, lost rent if you're leaving it vacant to sell.  Cost to stage and cost of any fix up items to sell that you would leave alone if renting.

But a 1031 is certainly the way to go if you're wanting to move it into another property and shelter whatever gain there is.

Matt K. · Answer

between closing costs when you purchased it to closing costs when you sell it and then closing costs on the replacement... doesn't that eat up decent amount of your appreciation.

Clayton Mobley · Answer

@Brian Heimerdinger The general rule of thumb is that you should hold a prop for a year or more for it to be considered a long-term investment.

However, the actual rules for a 1031 are not hard and fast with regard to the specific amount of time you have to hold a property, it's just that most people feel more confident that the IRS will accept the exchange if they've held the prop for 12 months or more. What really matters is your intent when you purchased it. So, if you bought this property with the intention to flip and sell it, then you wouldn't qualify for a 1031 because flip properties are considered inventory, not long-term investments, which is what the 1031 is for.

If, on the other hand, you bought it as a long-term investment - with the intention to hold it as a rental, for example - but now need to sell because it's not performing as you anticipated and capital could be better used elsewhere - then you would likely qualify. You've had it 11 months, which is a good chunk of time. So if you could establish and prove that you intended to hold the property for the long haul, you'd likely be ok. The IRS knows that sometimes investments don't perform, or life happens and people need that capital to survive on, but if you try to execute 1031s on a property you've owned for like 60 days without ever trying to rent it out, or you try to do multiple exchanges with iffy holding periods, the IRS will likely not smile upon you.

Not knowing your specific circumstances, I'd say hang on for another month or two to be on the safe side and make sure you can show your intent (maybe through emails or forum posts from when you purchased it discussing it's long-term potential) in case the IRS wants to see documentation.

Of course, the MOST important thing you can do is get the help of a good Qualified Intermediary. You legally have to have one in order to do a 1031, it's not a DIY process. Both @Dave Foster and @Bill Exeter are super knowledgeable and helpful, and very active here on BP. If you want to execute a 1031 on this prop, your first step is to find a Pro to help with the process.

Best of luck!

Eddie Egelston · Answer

I'm sure you already know, you'll want to do a lot more research on this topic than just posting on a forum.

From what I have read you must hold the property for at least a year and must have bought it for investment purposes. (Not a property you are flipping.)