Condominium Deconversion Tax Implications

[Aashiq Dheeraj]

Hi All, 

My primary residence is a condominium that may be "deconverted" into apartments. There is an institutional investor looking to purchase my entire building, and if 75% of residents agree to the sale, everyone must sell.

I would have substantial gains due to the outside of market purchase price. I purchased my property less than a year ago, so I do not qualify for the 121 exclusion.

One idea I had was to move and rent out the property. I was hoping it would then qualify as an investment, and I could do a 1031 exchange. 

Is there a minimum time that one must rent out the property to qualify for this exemption? Does anyone know of other techniques for deferring taxation on this gain?

[Bill Exeter]

Hi @Aashiq Dheeraj, 

There is no specific or required holding period in order to qualify for 1031 Exchange treatment. The critical issue is that should you be audited you would have to demonstrate that you did in fact have the intent to hold the property for rental, investment or business use. The longer you can hold the property as rental property that easier it will be to prove that you did in fact have the intent to convert the property and hold the property for rental purposes.

Documenting the conversion of your property into a rental property would be critical in case you were to be audited. Emails to your advisors, notes to file, rental/lease agreements, etc. would all go a long way to prove that you did in fact have the intent to convert and hold the property for rental purposes.

Advisors often recommend a minimum holding period of 12, 18 or 24 months in order to demonstrate that you did in fact have the intent to hold for rental purposes. These are only opinions, but can go a long way in helping you prove your intent to hold for rental purposes.