1031 Exchange - Short term capital gains - how are they treated?

[Prithvi Sri]

I bought a commercial property some six months ago in a 1031 exchange. Now, there is a good demand for the commercial property and I might be able to sell it for a pretty premium. The idea is to sell it and move the money into a different real estate investment as part of a 1031 exchange. The question I have is, I know the cost basis gets carried forward with a 1031 exchange. Say for example, I eventually decide to sell the next property for cash. So, will the profit I am booking on the current property is treated as "short term capital gains". If this is confusing, see the timeline.

Property A - Bought in 2005 for 800K. Sold in 2021 Feb for 1.7M.

Property B - Bought in March 2021 for 1.8M (original contract was in Nov'20 which got me the lower price). This is the property I now have in my hand. I have a couple of offers for 2.4M. I might finally get some 2.45 to 2.5M for this.

Property C - When I sell Property B, I will most likely buy a different property. 

My question is, when I eventually sell property C for cash (or Biden gets rid of 1031 benefits), will the profit I am making on Property B are treated as short term capital gains or long term capital gains?

I hope this question makes sense. Would love to hear your feedback and also any stories of your adventures like this. Thank you.

[Dave Foster]

@Prithvi Sri, typically the holding periods are tacked together.  So if you finally sell and pay the tax it should be all long term capital gain.  But if you follow the 4 "D"s of 1031 investing - Defer Defer Defer and Die, you'll continue using the tax deferred dollars for your benefit until death at which point your heirs inherit the property at a step up in basis.  So the tax goes away for them.