1031 in less than a year (short term capital gains)

[Nick Frey]

Property A was owned by LLC A 50/50 me and another partner. After five years of LLC A owning Property A, I created LLC B with two extreme-minority partners (0.5% each, as a formality for lending purposes) and bought out Property A.

I used my $250k primary residence cap gains exclusion on this sale from LLC A to LLC B after having two tax years where Property A was not generating income (less than 14 rental days per year) and could be deemed a personal residence instead of investment property. Also didn't depreciate it as a business asset.

Sale price set a new cost basis for LLC B. Closing date of this sale from LLC A to LLC B was October 9, 2020.

Now Property A is going to likely be sold with closing in July or August, 2021...less than 12 months later.  The gain is going to be extremely significant, likely a 50%+ increase from the 10/9/2020 closing.

It was not a flip and was not intended as such, it was used by LLC B as a long-term rental...but now taking advantage of market conditions, re-leveraging, etc.

QUESTION: is this a 1031 candidate, or am I running the risk of an audit at least, and possibly getting hit with massive cap-gains at worst?  I'm hoping to 1031 into a larger MFH investment or self storage...but I've contemplated a good-looking OZ fund in Colorado as well.  It sounds like the OZ option might be safe since there isn't a lot of "precedent" set yet, and it's relatively flexible in its interpretation of capital gains.  But the 1031 option might be the way I'd rather go, I just don't want to find out I'm disqualified for it because of the under-365-day STCG issue...

[Ashish Acharya]

Originally posted by @Nick Frey:

I've found this article which doesn't really provide a lot more clarity: https://www.hanson-cpa.com/hol...

I'm hoping to get someone who's been through something like this, either directly or as an advisor (accountant, attorney, QI, etc)

 Nick, 

Intent to hold for investment is the taxpayer's subjective intent. The IRS looks at objective facts and circumstances to determine if the taxpayer's intent was to hold property for investment. In Goolsby, the Tax Court held that the taxpayers did not prove their intent to hold property for investment at the time of the exchange. The taxpayers purchased the property, quickly moved into the property, and made minimal efforts to rent the property. In contrast, in Reesink the taxpayer made stringent attempts to rent the property, and only moved into it several months later when the real estate crash forced them to sell their primary residence.

You sold the property at FMV and then also rented. Now, you are taking advantage of appreciated market. You are not the only one who is doing this.