What You Need to Know About 1031 Exchange Holding Period

The 1031 exchange holding period can be a bit of a hurdle for investors, but understanding the basics can make all the difference. To qualify for a 1031 exchange, you must identify replacement properties within 45 days of selling your initial property.

You can identify up to three potential replacement properties, and you can also identify as many as three potential replacement properties of any type, including real estate investment trusts (REITs) and other investment properties.

A two-year holding period is a commonly accepted standard for 1031 exchanges, as mentioned in several IRS Private Letter Rulings and expert opinions.

The IRS considers time to be just one of several factors when evaluating a 1031 exchange, with the main focus being on the intended use of both properties.

To qualify for a 1031 exchange, investors must hold the relinquished property for investment purposes, which is typically defined as at least two years.

Investors who hold their properties for 12 months or longer are more likely to report them as investments in their tax filings.

The Treasury may consider a one-year holding period as a suitable baseline standard, although this was never included in the tax legislation.

If a property is purchased right before an exchange attempt, the IRS may consider it to have been bought for resale rather than for investment.

Here are some key holding period requirements to keep in mind:

The IRS will consider the intended use of both properties when evaluating a 1031 exchange, rather than just the holding period.

The exchange holding period is a crucial aspect of a 1031 exchange. It's the period of time you own an asset before disposing of it, and it begins the day after you acquire the asset and concludes the day you dispose of it.

To qualify for a tax-deferred exchange, the property must have been held for investment purposes, rental purposes, or used in a trade or business for at least two years. This is a commonly accepted standard, although some experts suggest a one-year holding period may be sufficient.

The IRS will consider several factors when evaluating a 1031 exchange, including the intended use of both properties. If you've purchased a property right before attempting an exchange, the IRS may consider it to be held for resale, not investment.

A two-year holding period is generally considered a safe bet to avoid an IRS challenge to the validity of the exchange. This allows investors to complete uncontested 1031 exchanges and gives them options for their properties, such as transferring ownership from a partnership to co-tenancy between individual partners.

Here are some general guidelines for holding periods:

In the case of a limited liability company or partnership, if only some members want to complete an exchange, they can distribute undivided interests to each member before the sale, allowing them to do their own exchange while others cash out.

A "Drop and Swap" situation like this doesn't count towards the individual's new ownership, as their prior ownership interest doesn't count towards their new individual ownership.

Taxpayers who sell an investment property and trade into another investment property, even if it's for a short period, can still take advantage of a 1031 exchange if they bought the property with the intent to hold it as an investment.

The taxpayer put a tenant into the property or actively advertised for a tenant, and did not put the property up for sale personally or through a listing real estate broker, indicating that the property was held for investment purposes.

Builders who typically buy or build property with the intent to sell it can still use a 1031 exchange if they hold the property for a few years and then put it up for sale with the intent to exchange it for another investment property.