If I have a property that I fixed up a year ago, am I able to do a 1031 exchange on it now? The real question is when you fixed up that property was your mental intent to hold it for investment or business purposes, or was your intention to flip it?
Selling While the Market is Hot
Many people that are buying properties or have recently purchased properties initially acquired them with the intention of holding them for long-term rental purposes. But because of the tight inventory and the limited number of properties available for sale they are having an epiphany and saying: “I need to change my mindset and put this property on the market because it has appreciated tremendously even in the short period that I've held it. Why should I hold it for years in order to get a good return when I can get a good return right now.”
While people may have initially acquired it with the intent of holding it for investment or business purposes they're dipping their toes in the market. They're testing the market to see if an exorbitant price can be had, and if they can get it, they're going to exchange it even if they have a relatively short holding.
Consult with your Tax Professional
It's important that taxpayers consult with their CPA or Tax Advisor regarding short holding periods. It’s also important that they substantiate and prove up their intent by doing any of the following:
- Showing their accountant their initial correspondence that articulates an intention to hold it for investment or business purposes.
- Showing their accountant the advertisements that they placed showing that they were advertising the property for rental purposes.
So there's a lot of different ways to prove up your intention that you initially acquired it for business or investment purposes, but because the market changed drastically and values jumped quickly, you instead decided to sell it after a relatively short holding period.
- 1031 Hotline: If you have questions about 1031 holding periods, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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