How Long Do I Need to Hold A Property Before 1031 Exchanging?

Qualified Intermediaries are often asked about the holding period in a 1031 Exchange. Investors who are taking advantage of short-sales, foreclosures and REO’s need to be especially mindful of the 1031 Exchange rules.

Since 1031 is for deferring Long Term Capital Gains (LTCG) taxes, some advisors feel that holding a relinquished property for a minimum of one year is sufficient as LTCG is a holding period of “more than a year.” Additionally, if a property is held for over a year it will show up on two tax returns. The IRS takes a much more conservative approach in a Private Letter Ruling stating that a holding period of two years would be a “sufficient.” The IRS also created a “Safe harbor” for vacation home exchanges in a recent Revenue Procedure which includes a two year holding period for both the relinquished and replacement properties.

Given the IRS’s decisions in the above rulings most advisors prefer to see a holding period of two years. Holding period needs to be addressed on a case by case basis, taking into account investment intent as well as the facts and circumstances of an investor’s particular situation.
Always consult your attorney and tax advisors well before entering into an exchange contract