State of Mind Matters & the 1031 Holding Period

This article is all about the 1031 holding period, which is not really a period but more a state of mind. When you acquire a property in a 1031 exchange, you need to have the proper intention, specifically to hold the property for either investment or for use in a trade or business.

How Long Do I Have To Hold the Property?

Many people ask the following question:

"After, I have completed a 1031 exchange, how long do I have to hold the property?"

The answer depends. If you buy the property and immediately list it for sale and try to unload the property, then it seems apparent to me that you weren’t holding the property for investment because you have immediately listed it for sale. This is more indicative of holding the property primarily for resale. Remember that property that you hold primarily for resale is viewed by the IRS as your inventory (your stock in trade). They don’t allow 1031 exchanges on your inventory. So, if you immediately unload the property, it is not necessarily that you violated a holding period, it is that you violated the intention, the (mental) holding requirement.

What are your Intentions?

As a result, it is essential to consider your intentions when you acquire a property during your 1031 exchange. Here's another hypothetical situation:

  • You purchase a property, and after you acquire it, someone comes forward with an unsolicited offer.

  • You did not have the property listed for sale - this person just came out of the woodwork and offered you a great deal of money - more than what you paid for it.

In this circumstances, it seems to me that even though you ‘held’ the property for just a short time, you had the proper intention when you acquired it. It doesn’t matter that you disposed of the property shortly after acquiring it. What does matter is that you had the proper intention.

1031 Tip: If you receive an un-solicited offer to purchase your 1031 replacement property, you could write a letter to the purchaser saying the following: “Thank you for your offer. When I acquired the property, I intended to hold it for investment purposes, but your unsolicited offer is persuasive, and maybe we can meet a mutually beneficial result. Maybe I will be persuaded it sell it to you.”

  • Start Your 1031 Exchange: If you have questions about going into a 1031 exchange with the proper intentions, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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