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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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