One of the most commonly asked questions about 1031 exchanges is how long do you need to use real property for investment or business purposes before it can be exchanged in a 1031 transaction?
The 1031 exchange holding period is a cognitive test – not an objective time frame. With that in mind, it’s important to discuss it with your CPA, accountant, and other advisors on the specific transaction. When you acquire your replacement property in a 1031 exchange, your intention must be to hold that property for investment or for use in your trade of business. That’s the requirement.
Safe Harbor
There is a safe harbor that is applicable to VRBO, Airbnb, or other intermittent rental properties. If a client buys a replacement property and puts it into an intermittent rental plan, the IRS under their safe-harbor tests two twelve month periods. In other words, after acquiring such a property, they examine two twelve month periods to ensure that you are using the property for investment or business purposes.
Since we know that the IRS has this standard for intermittent rental properties, some tax advisors use this standard (a minimum of 24 months) for other types of 1031 exchange.
I’ve had clients get audited who have moved into their replacement property. In one instance the client won the audit. She had rented the property to a tenant in an arms-length lease and documented receipt of rent checks for 18 months. Another client of mine moved into their replacement property after three months. This did not go over well with the IRS.
Intent Matters
At the end of the day, it’s your intent that matters. Things can change in the future, or course, but it’s your initial intention when purchasing the property that the IRS looks at when determining whether or not you are abiding by the regulations.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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