How long until I can do another 1031 Exchange?

Question

Hi BP,

Quick question, I completed a 1031 exchange on 9/2023 (about 4 months ago). I purchased a 6 Unit Multifamily as the replacement property and put about $150K in renovations into it. However, after thinking about it, I would much rather sell it because I'm not able to get the rental amounts I originally thought and I would much rather buy 2 duplexes so I have less of a headache. If I sold the property I would be looking at a profit of about $350K minimum.

I was doing some research on google and also asked the 1031 exchange company, they said the IRS generally wants you to hold the replacement property for at-least 2-years before conducting another 1031 exchange, however that it's not a set rule, it's just recommended. I wanted to know if I would be able to conduct another 1031 exchange? This time I would buy 2 ready-made duplexes that are much easier to rent out with the proceeds.

Thank you for your time!

Dave Foster · Answer

@David M., no vacation for me.   Just trying to stay warm in FL.  the struggle for survival when you don't own socks, mittens, or a touque is real!!!

@James Boreno, there is no statutory holding period.  The two year interpretation came from one case law decision where "two years" was used as an example of an appropriate holding period.  Unfortunately, the phrases 2 tax years and two calendar years have also been used by the IRS.  So it is just a little open to interpretation.  there was even a mantra in our industry of "one year and one day".  Which everyone thought was pretty cool because that always meant that you had owned the property long enough to qualify for long-term capital gains.  And you had owned the property acros both two tax years and two calendar years.

But there's no magic in that either.  It does come down to what @Alex Olson refers to - your intent and how you demonstrate that intent.   If you've owned that over a year and are dissatisfied with cash flow and the property you are probably fine to go ahead and sell and do another 1031.  I'll reach out via pm to see if we can help you out.

Wayne Brooks · Answer

@Dave Foster can give guidance.

Dave Foster · Answer

@James Boreno, There is no statutory holding period.  Your intent must have been to hold that property for productive investment use.  Your original post mentioned that cost of improvements were greater than anticipated and you had become concerned that you were not going to be able to rent it for what you needed.  So you were deciding to sell rather than hold.  That sounds like someone who had the intent to hold but is changing that intent for good business reasons.  It's all about your intent and how you can demonstrate that.

Justin Brickman · Answer

Loved this question and response

David M. · Answer

@Nate Herndon Not sure if you just speaking loosely, but you can't 1031 a fix 'n flip.  They aren't investment property, but treated as inventory for tax purposes.  You can only 1031 investments, say generally rentals.

I guess @Dave Foster is off vacationing :)  better wait for his guidance on doing back to back 1031's.  I would guess earlier than 1 year would be bad since it'd be difficult to claim that you had the property as an investment.  I understand why 2yr was mentioned since it easier to justify as an investment.  (shrug)

Alex Olson · Answer

@James Boreno You need to hold it a year unless there is a circumstance where someone bought it for you off market and came to you - at least that is what you need to show the IRS. There is no hard and fast rule. You need to hold it with the intent of investment purchase and therefor collect investment returns or hold for a long period of time it has appreciated enough and can prove to the IRS that this is an investment, not a flip.

James Boreno · Answer

@Dave Foster Thank you for the response! However I've held the property since September 2023, so it's been about 4 Months now. Would I have to wait until 1 full year passes before conducting another 1031 Exchange or would I be able to do another one now?

Leslie Pappas · Answer

Yes, taxpayers who hold their relinquished property for two years satisfy the requisite intent for a 1031 Exchange (or two tax reporting periods, since in an audit the IRS may look backwards and forwards two tax returns). A holding period of over a year has generally been accepted, but may be subject to review by the IRS. A much shorter holding period has been accepted, where a change in circumstances indicates that the taxpayer had intended to hold the property for a longer period. The IRS will look at ‘investment intent’ and will call a taxpayer quickly flipping property a ‘dealer’ vs. an ‘investor’.

Best bet is to consult with your tax advisor

Nate Herndon · Answer

Man, that is a great question. Following this thread as I am interested to hear any advice. You can't be the first person who rolls 1031 funds from one fix-and-flip to the next in under two years.

I just wrapped up financing a quadplex and duplex for someone on a 1031 and learned more about what the exchange funds can/cannot pay for via the HUD. Pretty interesting!

How long until I can do another 1031 Exchange?

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