1031 property "Held for" investment purpose

Many times, people will ask, "How long do I need to hold a property to be considered investment property under 1031 rules?

In order to qualify for a 1031 Exchange, both the relinquished and the replacement properties must have been acquired and “held for investment or for use in a trade or business." The amount of time is not specified in the Code or Regulations. In a private letter ruling (Ltr Rul 84-20939), the IRS ruled that two years was an adequate holding period. But, they did not go as far as saying two years is mandatory. Tax and exchange professionals generally consider a minimum of one year to qualify as "held for" investment purposes. This seems to fit with the long-term capital gains requirement.

If a taxpayer acquires a property immediately before an exchange, or if he buys a replacement property and immediately disposes of it following an exchange, it was probably not going to meet the “held for” requirement. But what about the owner that purchases a property for investment and changes his or her mind three, six or eight months after owning the property?

In short, there is no safe harbor holding period for complying with the “held for” requirement. Compliance is based on the taxpayer’s intent demonstrated by facts and circumstances surrounding the taxpayer’s property acquisition. It most likely comes down to what the taxpayer does with the property and how much evidence he or she has to support that original intent.

Here are a few transaction examples having potential for an IRS finding that the “held for” requirement has not been met:

• The taxpayer purchases a property, spends three months remodeling it and immediately proceeds to sell and exchange it.


• The taxpayer acquires replacement property and immediately lists the newly acquired property for sale. In this case, clearly the intent was not to acquire the property for investment purposes.


• The taxpayer acquires replacement property and immediately converts the property to a personal residence or vacation home.


• The taxpayer receives a deed from a partnership and immediately sells it or acquires replacement property and immediately transfers the property to an LLC, partnership or corporation.

While no time is outlined in the regulation, a significant period of time between purchase and sale is desirable to reduce the risk of possible “held for” issues in an exchange. How long? It's not clear. If there is any doubt, sound tax professional advice should be considered. In an audit, the burden of proof is on the taxpayer to support his compliance with the “held for investment or productive use in a trade or business” requirement.