How Quick Can You Really 1031 Exchange??

Question

It seems like such a gray area. From the research I’ve done, some go 12 months and some go 6 months. There are others who even stretch that and say there is nothing you can do if someone offers you a nice profit. After all, the IRS just wants our intent to be keeping it as a rental.

I have a 4-plex that I purchased February 15th on Daytona Beach and renovated to force appreciation. I was wondering when the majority here thinks I can sell it without any issues.

Kate Supino · Answer

Most tax professionals advise investors to hold property at least one year to demonstrate intent to use the property as an investment. However, there's nothing in the tax code that specifically mentions a certain amount of time you need to hold the investment before selling. You can demonstrate intent to use it as an investment by doing things like spending money on marketing for tenants, listing it for rent online, etc. and then retaining evidence of those efforts.

Jordan Callaway · Answer

@Eric Mayer

I’d wait until 1 yr but not a lawyer

Then when you get an offer or list you can start looking for properties but once the buyer’s earnest money goes hard (becomes non refundable) then start looking aggressively and MAKE SURE to setup intermediary third Party 1031 escrow prior to closing bc you can’t touch the money

Then once your property closes you have 45 days to identify property (after that you can’t change these) and then close on trade property within 6 months of other sale

Let me know if you have q

Dave Foster · Answer

@Eric Mayer, Black and white is ever so much easier than shades of gray.  But that's where the IRS has left us with the holding period argument.  When tax courts have said that "two years", "two calendar years", and "two tax years" are all suitable holding periods it's a little tough to distill it into a specific time.  It took our fine country's legal industry to figure that those three interpretations span a time period of 2 days to 730 days. And with the changes in capital gains structure over the last 25 years it's a nightmare to define what a capital investor is anyway.

The service is very interested in cracking down on "dealers" who purchase with the primary intent of reselling.  In order to attack that they have no choice but to make it an "intent" issue.  So that's where we're stuck.

The optics are certainly better if you hold it so you have income reported on two consecutive tax returns.  But in the end it comes down to what you feel comfortable saying in front of a mirror - and if they believe it.

Eric Mayer · Answer

@Kyle Kadish Good point. I won’t list it in the first year.

Kyle Kadish · Answer

@Eric Mayer Biggest concern is proving intent to own as investment - and how that is substantiated.

If you recieve an unsolicited offer to buy your property, it is likely fine.  However if you list it for sale in a short period of time, your inent is clearly not to own for investment.

How Quick Can You Really 1031 Exchange??

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