Now that the sales of Real Estate have ticked up, the question becomes can I 1031 Exchange new properties held less than one year? The big question the IRS asks is intent. What was your intent with the property and do you intend to make this a long term hold? Unfortunately for us, the IRS does not tell us exactly how long to hold a property to qualify for 1031 exchange treatment. The one thing the IRS does tell us is that they do not like property to be exchange if it was held for resale. So basically they are saying if you buy a piece of property and you put a sign up in the front yard, this will not qualify and then you buy another property and flip that one.
Again it goes back to intent. If properties are held for speculation they can qualify for 1031 exchange treatment. So if I buy a property on foreclosure and fix it up (which takes 3 months), and then I list it and sell it, and I want to buy a long term rental, can I do a 1031? I have double my money on the sale of the foreclosure, and my intent is to keep my money in real estate. Again the answer is grey but I would consider discussing an exchange as long as the client holds the property long term. I would say long term is at least 2 years.
The reason I say long term is 2 years plus, is that there is a recent Revenue Procedure discussing holding property for 2 years. That make me think that is what the IRS is thinking. Typically if your property fits perfectly into the 1031 box (say a pure rental), I would say 1 years is long enough to hold a property for an exchange, again along as your intent is to stay in real estate and not cash out.
Dave Owens, CPA, CES is the Managing Member of Entrust 1031 Exchange. His website is www.Entrust1031.com. Feel Free to contact him at do2009@1031company.com or 239.333.1031.
Dave Owens, CPA, CES®
Managing Member
1520 Royal Palm Sq Blvd #320
Fort Myers, FL 33919
239.333.1031 x203
239.466.5496 Fax
www.AdvantaTrust.com
PS - Download your free copy of my new eBook on Real Estate IRAs at www.daveowens.com.
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The crux of the matter is, are you an active "trader" or "investor" for purposes of taxation and Sec 1031 of the IRC. Unfortunately, the IRS cannot give guidance on this, it is more factual than textbook. In other words, "if it quacks like a duck, then it is a duck." Or in this case, "are you flipping and avoiding taxation, or are you legitimately holding the property for investment and properly deferring taxation until the end of the investment activity?"
As a CPA and Broker/Owner of a home services organization, I try not to wear both hats when advising my clients. In fact, I rarely (if ever) put on my CPA hat when wearing my Realtor hat. I let my Gold Services partners deal with the tax advise and, of course the administrator has to consent to the exchange. So if a client tells me that they need to replace a property within 45 days of disposition of another property, I insert the necessary clauses into the offer to purchase (or listing agreement) and let the closing attorneys worry about the rest.
I sleep better at night doing this.