1031 exchange in less than a year

[Loga Siva]

Hello BP Friends, Can we do a 1031 exchange on an investment property we bought 9 months ago? Is there a tax implication? What are the things we should be aware of when performing a 1031 exchange? Please educate.

[Joe Splitrock]

Originally posted by @Jonathan Pavkov:

I'm running into this right now. I purchased a property, then found a better deal and sold the original property, all within a year. The intention was to buy and hold, but I sold it. I did a 1031 because my purpose was to hold. Hoping it holds up.

 I think people put way too much faith in believing the "intention to hold" satisfies the requirements. "Finding a better deal" is not a good argument for change of intention. If that was true, every flipper could just exchange their properties and claim a better deal came along. The trouble is that the holding period is really the main thing that defines intent per the IRS. The IRS has published guidance that states 24 months is the safe holding period at which they will not challenge. 

https://www.irs.gov/pub/irs-dr...

Some people feel one year is sufficient, because it is the defining point between short term and long term capital gains. There is an argument the asset was held long term for investment at that point. Under a year is considered high risk, because the IRS chose not to even say 12 months was sufficient safe harbor. 

Of course it is only a problem if you are audited or if the exchange ends up flagging you for audit. One thing worth considering is the political climate around real estate loopholes and the current administrations plans to increase IRS staff to increase the number of audits. I would be more cautious looking forward.