Minimum Time Requirements for Holding 1031 Exchange Property

Despite the IRS’ penchant for deadlines and time rules, one area where Uncle Sam doesn’t provide explicit guidance has to do with how long you must own property before relinquishing it in a #1031 exchange. In a break with their normal obsession with outlining timing rules, the tax code doesn’t provide any specific time requirements for holding property before you exchange it.

So what is an investor to do? Does the lack of codified time frames mean 1031’s are the perfect vehicle for flipping propery? No! The IRS keeps a keen eye out for investors who use flipped properties in a 1031 exchange.

If the IRS deems your relinquished property to be a flip, it will likely reject your exchange altogether. This will result in immediate tax due on your capital gains. To avoid this risk, the general advice of 1031 experts is to hold any investment or business property for at least one year before making it the relinquished property in a 1031 exchange.

But where does the one year suggestion come from if not spelled out in the tax code? Likely because in the past, the government has proposed a one-year hold on several occasions. This proposal, however, has never been incorporated into the code. Another possibility is the one-year timeframe that differentiates short-term and long-term capital gains. Property held less than one year is considered a short-term gain, while property held longer than that is a long-term gain.

Of course, if your exchange involves “related parties” then all of this is moot, because the tax code does set out a minimum two-year holding requirement for these discreet circumstances. The bottom line is that to avoid unnecessary IRS scrutiny, plan to hold your future relinquished property for at least one year before starting a 1031 exchange.

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.