How long must I rent after cost segregation before I 1030

Question

As the title suggests, I am a real estate professional and want to harvest a bonus depreciation on a property. I also want to sell it eventually to capture its equity. The single family home will realize a big gain in equity after my remodel, but it will only receive a modest rent price.

I estimate that it will be worth about $500k and will rent for $3,300 per month. After all expenses, it will only generate $1,100 per year. My total invested will be about $380k. I would like to do a 1031 exchange to roll the equity into a house that generates a better cash flow opportunity.

How long do I need to hold it as a rental before I do the 1031 exchange? I think it will get me around $75k in bonus depreciation after the cost segregation is done.

Jeff Nash · Answer

There’s technically no required holding period as intent is what matters, and you would be already demonstrating it is an investment by renting it out (presumably at fair market value to third parties or those unrelated to you). Usually the holding period for an investment is assumed to be for a period of time, which generally is 1-2 years as that is by definition long—term. In my opinion, it just looks better when the Form 8824 on the tax return is completed and it shows a longer term holding period, but that is not always necessary if you can support a shorter period.

Jeff Grant · Answer

Thank you both for your responses. I’ll probably cost seg and rent it for a year before I 1031.

Dave Foster · Answer

@Jeff Grant, The holding period will not be hinged on when you cost segregate. It will hinge on your intent in purchasing. If your intent was to hold it for productive use then it qualifies for 1031 treatment. The mantra in the 1031 industry used to be "one year and a day". But the only magic in this was that it served to put the sale and purchase on two different tax returns. It always made the deferred gain a long term capital gain. And it satisfied a couple of old case rulings which had said - "two years", "two tax years", and "two calendar years.

Most folks are very comfortable with anything over a year. There could always be something in your unique situation that would allow for less. But the key is still your intent.

Isaac Weinberger · Answer

@Jeff Grant- Good to know that exchanging the property will avoid depreciation recapture. Good going!

Rick Pozos · Answer

@Jeff Grant You mentioned that you would have about 75k in bonus depreciation. That should lower your taxes on your regular income and you should pay about 20k less in tax. That will increase your $1100 return. Just saying.

How long must I rent after cost segregation before I 1030

How long must I rent after cost segregation before I 1030

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