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HOW LONG MUST AN INVESTMENT PROPERTY BE
HELD FOR THE IRS TO CONSIDER IT A "LIKE-KIND" PROPERTY?
IRC §1031 states that property "held for productive use in a trade or
business or for investment" must be exchanged for like-kind property. Each
week, the professionals at Asset Preservation are asked numerous times
exactly how long a property needs to be held to be considered an investment
property by the IRS. There is much confusion and misinformation among real
estate agents and investors on the issue of what is viewed as "held for
investment."
WHY THE CONFUSION?
1. Neither the IRS nor the Regulations provide a comprehensive definition
of the phrase "held for investment." (The regulations do state, however,
that unproductive real estate held by a non-dealer for future use or future
appreciation, is held for investment.)
2. Many investors have been given incomplete, or worse, incorrect answers
with respect to this question. For example, in the Forbes June 1999 article
on §1031 exchanges, entitled Trading Places, the author incorrectly states
"you must rent out your new house for at least 12 months and a day."
A MORE COMPLETE ANSWER
There is no safe holding period for property to automatically qualify as
being "held for investment." Time is only one factor at which the IRS looks
in determining the Exchanger's intent for both the relinquished and
replacement properties. The IRS may look at all the facts and circumstances
of an investor's situation to determine the Exchanger's true intent for both
properties involved in an exchange.
TWO ADDITIONAL PERSPECTIVES
In one private letter ruling (PLR 8429039), the IRS stated that a minimum
holding period of two years would be sufficient. Although a private letter
ruling does not establish legal precedent for all investors, there are many
advisors who believe two years is a conservative holding period, provided no
other significant factors contradict the investment intent.
Other advisors recommend that Exchangers hold property for a minimum of at
least twelve months. The reason for this is twofold: (1) A holding period of
12 or more months means the investor will usually reflect it as an
investment property in two tax filing years. (2) In 1989, Congress had
proposed a one year holding period for both the relinquished and replacement
properties. Although this proposal was never incorporated into the tax code,
some believe it represents a reasonable minimum guideline.
The investor's "intent" in holding both the relinquished and replacement
properties is the central issue. Each Exchanger and their advisors should be
able to substantiate properties relinquished and acquired in a tax deferred
exchange were "held for investment."
Back to Table of
Contents 1031 Exchange Information
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Unless otherwise stated square footage and lot dimensions appearing herein are
derived from county records and may or may not be accurate.
If square footage is material to a transaction a survey or other measurement is
recommended. This information deemed reliable but not guaranteed. Current or
previous year’s taxes may not accurately forecast future property taxes.
Property taxes can increase from one year to the next for various reasons.
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