(The only stated time periods in exchanges are the building identification period and the exchange period. You must identify the buildings you are evaluating within 45 days of your sale closing and you must have your due diligence done and close on your new building, the exchange, within 180 days.)
To get back to my explanation, people doing an exchange think that there’s a “holding period” requirement for exchanges – meaning, that they have to “hold” (own) a property for a certain period of time, either before or after doing an exchange, in order to qualify for an exchange.
It is true that the amount of time a property is owned – both the sold (or surrendered) property and the new (or replacement) property - is a major factor in determining whether a property qualifies for an exchange.
However, there is no “official” or "stated" time period.
The main factor that determines everything is the intent of the person doing the exchange to use the property for investment or business purposes. This means that – “At the time the investor buys a property for an investment, they should not intend to sell the property, or move into the property as a residence, in their foreseeable future.” The elapsed time is the evidence of this intent.
Am I kidding? No! But who of us will ever buy any property without ever intending to sell it? I’m not a lawyer; we all know this. Even so though, the law is very confusing, and often contradictory, but here are some procedures to give you a better chance of surviving an exchange audit.
- NEVER give ANY indication, whether in your files or by telling someone, that you ever intend to move into the property or sell it, prior to or at the time of closing on an exchange property.
- Although there is no “official” time period, common sense dictates to hold the property for at least one year and a day, either before you exchange it or after you exchange it. The longer you hold the property the better for more reasons that the exchange appearance.
- If you move into a property or sell it in less than a year, be very prepared to explain how this was NOT your intent when you bought the property.
- Always work with an Intermediary, arms length transaction, and your own financial and legal advisers. This will help resolve any, or at least most, questions in any exchange.
Hopefully this answers the questions on most investors’ minds. Done right, 1031 exchanges are great ways to defer taxes, not avoid them. It affords an easy way to build your portfolio very quickly. Remember to use financial and legal advisers who have experience in this field.
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