1031 Exchange Investor Question:
I purchased a property last year in a 1031 exchange. I now want to sell this property along with another property and 1031 exchange into something else. Is there any penalty for only owning the property for one year?
The Bigger Question: Why Sell?
Before we get into IRS rules and timelines, the first step is understanding your motivation for selling. Are your revenue and expense projections not lining up with reality? Has the neighborhood or market shifted in a way that makes the property less desirable for your goals? Or is your strategy evolving, and you want to move your capital into a different kind of property?
Your intent as an investor matters and that intent is at the heart of whether your 1031 exchange qualifies.
Understanding the 1031 Exchange “Holding Requirement”
One of the most common myths about 1031 exchanges is that there is a hard-and-fast rule about how long you must own a property before selling. The IRS has never set a specific minimum holding period in the tax code or Treasury regulations.
Instead, the key concept is qualified intent that you acquired the property for investment or business use. Proving that intent is a facts and circumstances test, not just a calendar test.
What the IRS Says
While no official timeframe is mandated, we can look at IRS guidance for context:
Private Letter Ruling 8429039 (1984): The IRS indicated that holding a property for two years would generally be sufficient for investment purposes.
Revenue Procedure 2008-16: In its safe harbor for rental pool properties, the IRS examined two 12-month periods, again pointing toward a two-year window as a conservative guideline.
These examples suggest that the IRS often views two years as a safe period to demonstrate investment intent for 1031 exchange purposes. However, shorter ownership periods can still qualify, depending on your circumstances.
1031 Exchange Factors the IRS Considers
When evaluating whether a property was held for investment purposes, the IRS looks at:
Your stated intent at the time of purchase
Whether you actively rented or used the property for business
The consistency of your actions with an investment purpose
The overall facts and circumstances of your ownership
Duration of ownership is just one factor, but it is not the whole story.
Practical Guidance for Investors Considering 1031 Exchanges
If you are considering selling a property after only a year, here is what to keep in mind:
Document Your Intent: Be prepared to show why you originally purchased the property for investment purposes.
Explain the Change: If circumstances shifted, like market changes, tenant issues, or a new opportunity, document that as well.
Consult Early: Talk with your Qualified Intermediary (QI) and tax advisor before listing the property. They can help evaluate your specific facts and circumstances.
There is no IRS penalty for selling after one year, but there is also no guaranteed safe harbor that short. The IRS relies on intent, facts, and circumstances to determine whether your property was truly held for investment.
If you are looking to exchange after only a year of ownership, proceed thoughtfully, document your reasoning, and consult with professionals to ensure you are aligned with IRS expectations.
Trust the Qualified Intermediaries at CPEC1031, LLC
If you are thinking of doing a 1031 exchange or investment real estate, put your trust in the qualified intermediaries at CPEC1031, LLC. We have over two decades of experience working on like-kind exchanges of all types (from forward exchanges, to reverse exchanges). Let us put that experience to work on your next 1031 exchange. Give us a call today at our Twin Cities office, located in downtown Minneapolis and set up a time to discuss how you can defer capital gains taxes with a 1031 exchange.
Defer the tax. Maximize your gain.
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