1031 exchange on a short term hold?

[Jeremy D.]

I sold a property that I had owned for 2 years on August 7th and utilized a 1031 exchange transferring the funds into escrow with a qualified intermediary.  I then purchased (2) properties on August 29th with the 1031 funds.  Now almost a month later, someone wants to buy one of the replacement properties, which will result in a short term capital gain.

Can I do a 1031 exchange on this sale and roll the basis into another replacement property?  Are there any issues with this since it would be a short term gain?

Thanks!

Jeremy

[David Krulac]

As long as your "intention" was to hold the 2 gained properties as investments and not inventory to be re-sold, you should be ok.  But you need to show that you had the intention with some documentation, like a signed lease for the property, newspaper ads, craigslist ads, photos of for rent signs on the property, etc.

And unless you do another 1031, by selling the 1 property you'll owe taxes not only on the 1 property sold but also a portion of the gain from the first property relinquished in the 1031.

An alternative would be to suggest to the buyer a rent with option to buy or some other mechanism to both show rental income as well as deffer the sale until year(s) down the road.