In a 1031 exchange you’re required to hold your property (both the sale property and the replacement property) for investment or use in your trade or business. But nowhere in the code does it specify how long you need to hold it. That’s a problem.
The Safe Bet
So how long do you need to hold your replacement property in a 1031 exchange? The safe answer to this question is the longer you hold your property, the better. If you could hold your replacement property for 2-4 years, you’re probably air-tight and have a valid 1031 exchange.
On the other hand, if you complete your 1031 exchange and hold the property for 7 months before gifting it to your children, that might be a problem because you maybe haven’t held the property with the mindset of investment or business purposes.
The safest answer is to hold your property for a long period and to evidence your intention. That being said, I have had clients who have purchased their replacement property and shortly thereafter received unsolicited offers to buy the property for substantially more than the taxpayer bought it. Even though they have a short holding period, their mental intent is likely consistent with 1031 rules and regulations and they’re allowed to do an exchange because they actually did intend to hold it for investment. If an unsolicited offer manifests that would be silly not to take, you can still qualify for a 1031 exchange. Bottom line, it’s all about your intent.
- 1031 Hotline: If you have questions about 1031 exchange holding periods, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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