Capital Gains vs. Ordinary Income, & 1031

Investor · Tempe, AZ · Member since 2019 · 102 posts · 66 votes

How long do I have to own a property before I sell it and the proceeds are subject to capital gains taxes vs. ordinary income? I believe it's one year.. but is that a calendar year (i.e. 1/1 - 12/31) or just 365 days? So if I purchased a property on 6/29/2022, I would need to sell it on or after 6/29/2023 before the tax type changes?

I also assume I can't sell a property that is subject to ordinary income (like something I've owned for four months) and then put the proceeds into a 1031 exchange, is that right?

Regarding 1031 exchanges, is it always a one-for-one? Or can I take the proceeds of the sale of one property and put it into two or more others? Or can I take the proceeds from two or more others and put it into one new property? What are the limitations in this regard?

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Manhattan Beach, CA · Member since 2021 · 76 posts · 40 votes
4y
You must hold the property for 12 months for it to be "qualified" for a 1031 exchange. However be careful with that and consult with you professionals such as a CPA and QI. There is no finite holding period for property to automatically qualify as being “held for investment.” A lot of advisors and CPA's will say two years is sufficient, but it's dependent case by case.
You can't put the proceeds of a sale of property that has been held for under 12 months into a 1031 exchange. The IRS will not see that property as held for investment purposes. But once again, consult with a CPA.
Under the 3-property rule, the investor taxpayer can identify up to 3 properties, regardless of the fair market value of the properties. You do not have to acquire all 3 of the properties that you identify if you utilize this rule, but you will need to close on at least 1 of the properties. If you are intending to diversify your real estate investment dollars, for example by investing in DSTs and want to identify more than 3 possible investments, then you will choose to not rely upon the 3-property rule.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
4y
@Nick Coons
You have to hold a property for productive use in business, trade, or just for appreciation. Not many realize this but it is your intent plus the holding period that qualify it for long term capital gains. If you have owned it for over 365 days and owned it with the intent of holding for productive use then it would qualify for ltcg. Most of the time a hold period of over a year (the mantra of "one year and one day" is used sometime) is fine. But there have been some situations where the IRS has decided that even a hold period of more than a year was not long enough to establish the intent to hold. And a 1031 exchange was disallowed. Owning it for four months would be too short a time unless you bought it with the intention of holding it and something unexpected cam up that made you change your mind (too many repairs, bad area, wildlife breaking into your dumpster every night).
The 1031 exchange qualifications are the same. If you have held the real estate with the intent of holding for productive investment and can document that intent if asked then it would qualify for a 1031 regardless of hold period. Most folks feel comfortable at any period more than a year.
You can allocate the proceeds from a 1031 however you want, you just have to make sure to buy at least as much as you sell and use all the cash proceeds to do so (this is if you want to defer ALL tax). So you absolutely could purchase more than one replacement property, as long as their total value is greater than what you sold.
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