Are Short-Term Capital Gains 1031 Eligible?

Question

Hi, I purchased an 8-unit set of townhouses in Seacoast New Hampshire in September 2020 and renovated all 8 units from October to January. The total project cost was ~$1.0M and now, based on current income/expenses and an 8% cap rate, the property has appraised for $1.350M. To raise capital for my next acquisition, I am refinancing the property with a higher loan principal and also contemplating the sale of 30% equity to a few limited partners.

If/when I sell 30% of the equity, my presumption is that I will incur a capital gain of ~$105K (0.3 x ~$350K). Because I have only owned the property for ~6 months, those funds will be a short-term capital gain and will be taxed as ordinary income. Are those short-term capital gains eligible for a 1031 exchange, assuming that I satisfy all other 1031 requirements? Or are only long-term (>1 year hold-time) eligible for a 1031 exchange?

Sean Ross · Answer

Happy Monday @Nick Gray, and hello Manchester (a really cool place!)

There is no specific statutory holding period for a property to qualify as "held for investment" in a 1031 exchange. The IRS (and the regulations) care most about "intent" and pattern.

You may hear some advisors suggest only 1031ing properties held for 12+ or even 24+ months. But this is the height of caution. Time held is only one factor that determines your intent as an investor.

If you make a habit of buying and selling too quickly, the IRS could deem you a "developer" and suggest that your property is "inventory" rather than real property held for investment. But if your fact pattern is different (maybe you have several other properties held for long-term use), then you are in good shape to do an exchange.

Be careful about how the sale and any future project are structured; partnership interests are not eligible for 1031 tax deferral.

Hope this helps,

Bill Exeter · Answer

Hi @Nick Gray,

@Sean Ross is right on the money.  It all boils down to intent.  You would need to demonstrate that you had the intent to hold for rental, investment or business use.  The good thing here is that you are retaining 70% of the asset, so clearly your intent is to hold.  Your business purpose for selling 30% is to free up capital for another investment.

You mention limited partners.  What would you be selling?  You would need to sell an interest in real estate in order to qualify for 1031 Exchange treatment.  Selling a membership interest or partnership interest in an entity would likely not qualify since it is not treated as buying real estate for tax purposes.

Ashish Acharya · Answer

Agreed with both the posts. Make sure you sell the interest in the RE.

Jason Malabute · Answer

There's actually no minimum holding period written into the 1031 rules, so a short-term gain isn't automatically disqualified. What the IRS really looks at is your intent, whether you held the property for investment versus buying, fixing, and flipping it. A quick buy-renovate-sell can look like dealer activity, and property held as inventory to flip doesn't qualify for an exchange. Having rental income and a pattern of holding for investment is what helps support that intent.

The bigger flag in your situation is what you'd actually be selling. To use a 1031 you have to exchange the real estate itself. If you're selling a partnership or LLC membership interest to your investors rather than a direct interest in the property, that typically won't qualify for 1031 treatment, so how the deal is structured matters a lot here.

The right approach really depends on your specific facts and how the sale is set up, so it's worth confirming with your own CPA and a qualified intermediary before you move.

Marnit Brown · Answer

Technically yes, but the IRS may challenge it.

Section 1031 requires the property to be held for "productive use in a trade or business or for investment." There's no specific minimum holding period in the statute.

But if you buy, renovate, and sell in 4 months — the IRS views that as dealer activity (flipping), not investment. Dealer property doesn't qualify for 1031.

Safe harbors:

- Hold 12  months AND have rental income → almost always qualifies

- Hold 6-12 months with rental income → gray area but usually works

- Hold under 6 months → high audit risk unless you have a strong investment intent argument

The holding period plus rental income is what establishes investment intent. A property you never rented and sold in 90 days is a flip, not an exchange candidate.

Alex Olson · Answer

Listen to advice on your QI. There are several on here that can help you. Bill and others.

Are Short-Term Capital Gains 1031 Eligible?

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