1031 Exchange Questions

[Emmett Gorman]

Hello All,

I am not currently in the real estate market (have 1 semester of college remaining) but am trying to do as much research as I can now so that I can hit the ground running once I graduate.

I read "Wealth Preservation Strategy: The Anatomy of a 1031 Exchange" by Joe Cronin and have a question:

1. He mentions how there is no set length a property must be held for in order to qualify for a 1031 Exchange as long as the intention of the property is for investment purposes. So say I have a history of buy and holding rental properties as investments, if I were to purchase a property, rehab the property, and put it on the market and it sells in a short amount of time (lets say less than a year) sell would it qualify? The process would be similar to a fix and flip, but if the property did not sell it would be used as investment rental property until it sold. Obviously with the money from the sale of the property, it would be reinvested into a property of equal or greater value.

Any help of this scenario would be much appreciated.

Thank You All

[Dave Foster]

Thanks for the kind words @Steve Vaughan.  

I think @Emmett Gorman answered his own question.  Intent is why you bought the property.  Did you buy the property to hold for productive use as your normal pattern and something changed that intent?  Or did you buy it with the intent of reselling and your intent changed when you couldn't sell it?

If the former then a 1031 exchange would be appropriate.  You would want to be ready to document your stated intent - Length of ownership is one demonstration but so is current practice, documented intent, strength of reason for change etc.

However, you make this statement, ..."The process would be similar to a fix and flip, but if the property did not sell it would be used as investment...".  This would indicate to me that you bought it with the intent primarily to resell and then your intent changed to holding for productive use.  Not eligible for 1031.

In most normal cases anything over a year is considered "safe".  But there are always circumstances where more or less might be appropriate depending on how you can demonstrate your "intent".

Both practices can coexist in your business model.  But use both boldly and appropriately so there is no question that you are "gaming the system".