- There is no specific holding period required for a property to be eligible for 1031 Exchange.
- Although no specific holding period is required for 1031 Exchange of property, Rev. Procedure 2008-16 does create a safe harbor whereby the IRS will not challenge the legitimacy of an otherwise eligible property as long as the property has been owned for 24 months. Please note, the property must still have been used for investment during the 24 month period and not, for instance, personal use as a primary residence or 2nd home.
- The IRS takes the position that a relinquished property acquired immediately before being disposed of in an exchange was acquired primarily for re-sale and is thus not eligible for 1031 Exchange treatment. Rev. Rul. 84-121
- Using the same logic as the point above, a replacement property disposed of shortly after a 1031 Exchange is not considered to be held for investment and thus is not eligible for 1031 Exchange. Even worse, the taxpayer may have converted long term capital gains into ordinary income is such scenarios.
- Unproductive bare land held for future use or future appreciation is eligible for exchange treatment. Bare land that is held for re-sale is considered to be inventory and is not eligible for exchange treatment. For example, homebuilders who routinely dispose of their unused bare land should not attempt a 1031 Exchange on such transactions.
- Recipients of inherited or donated real property cannot tack the use of the property in the hands of the donor. Once a property is received by gift, the donee should establish their own eligibility for 1031 Exchange, without regard to how the donor used the property. This is likely more important for inter-vivos gifts than inherited property as the donee will receive a carryover basis in the donated land, as opposed to a stepped-up basis when received by inheritance.
- Importantly, the question of whether a property is eligible for 1031 Exchange is a question of fact and the burden of proof is on the taxpayer. Some clients will ask me “How do they know how I used my property”. Unfortunately, that is not the right question to ask.
The issue of property eligibility is the most important and the most complicated issue taxpayer’s face when deciding whether to perform a LKE. Please feel free to contact me anytime at 916-899-4839 if you have a question. This survey admittedly only scratches the surface of the issue.
