1031 Exchange: How long do you have to rent?

Question

For an investment property to qualify for a 1031 exchange, is there an established minimum that you have to have a tenant in the house before you sell the home and exchange for the next investment property? For instance can you rent it out for 6 months and then do a 1031 or is that illegal/toeing the line of being primarily a flip (if you had in some way artificially appreciated property) and therefore not qualifying for the 1031 exchange?

Dave Foster · Answer

Account Closed is saying.

1. There is no statutory holding period. The facts and the circumstances that demonstrate your intent are the rule.

2. From 1996 when the statute was tweaked to sometime in the last couple of years the mantra was "one year and one day". There was no magic in this other than the following circumstances that would apply.

a. One year ownership usually turns the gain from short term to long term capital gain (which feels longer).

b. One day ensures that the property has

-been reported on two consecutive tax returns

-Been owned across both two tax years and two calendar years

Most of the one year and a day noise was an attempt to thread the needle of several vague revenue and case rulings. And only in the last couple years that the "2 year minimum" surfaced. But it is based on the same info above - just more conservative.

But the standard truly is your intent and how you can demonstrate it. Not the holding period.

Alex Olson · Answer

Simple rule is to show intent. If you buy something at a great deal and it cash flows for 6 months of so and then someone else comes along and offers you 3x what you paid for it, this may still qualify as a 1031 exchange. The most important rule is intent. 12 months+ is preferred.

Macy Bassler · Answer

Thanks, all, for the insight! Super helpful, would have never found those answers by simply Googling!

Natalie Kolodij · Answer

I'm so curious where this absolutely made up rule of 2 years to be a qualifying renatl came from.

I keep hearing it, mostly from people who are trying to flip houses and call it a "rental" for tax purposes, but there is no 2 year rule.

It's based largely on intent.

If you buy a rental and spend 4 months renovating it and month 5 a neighbor says before you rent it PLEASE sell it to my sister instead- they REALLY want ti live there.

You can likely 1031 that- the intent was a rental.

If you renovate a house to re-sell for profit, hold it for 24 months while rented as people are saying, then 1031...and you do this with 5 flips a year. You're gonna be screwed in audit.

There is no magic number- I'd love someone who is saying 2 years to point me toward the IRC or Guidance that backs that.

Account Closed · Answer

Not saying this is the gospel, as you know the IRS is somewhat vague in their rules but I guess I'm more on the conservative side. Jack is well respected here in Florida but attorneys and CPA's often view things differently. I think he lines this out perfectly as what not to do. I agree with you 100% on intent Natalie.

https://farr.com/1031-exchange...

Account Closed · Answer

@Macy Bassler The replacement property must be owned for at least 24 months as a rental before moving into it as a personal residence.

Carl N. · Answer

@Macy Bassler I believe it is either 2 or 3 years that a tenant needs to be present to be considered a rental but you may want to check with an accountant. The repercussions would be a clawback of taxes due I believe. Perhaps you may want to refi(cash out) it while owner occupied, then rent it so you have short term access to funds. From there you can rent it out for the necessary amount of time until you want to/can sell. This info is based on what I remember so definitely check with a pro first. Good luck.

1031 Exchange: How long do you have to rent?

1031 Exchange: How long do you have to rent?

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