1031 Exchange Time Frame
Hello All,
I've got a friend that is planning on fixing up properties, and selling them for a profit. He then wants to take the profit and 1031 it into a buy and hold rental property. Great strategy, but I was under the impression that you couldn't do a 1031 with a property unless you had held it for 2 years. Am I right about that? Is there a time from for doing a 1031 exchange?
Thanks for you help.
Cheers,
Nick
NIC:
I'k like to recommend 2 TCI ARTICLES:
First being my own and the other
The Most recent Article on 1031 TAX-FREE EXCHANGES:
Got to SEARCH and enter 1031 to review them both!
I hope this helps!
DERRICK
Hey Derrick,
Those where good articles, but they really only talked about stuff I already knew.
My question, which wasn't answered by those articles unless I missed something, is this.
Property A is going to be exchanged under a 1031 to property B. So my equity in property A is in essence going to be moved to property B.
How long do I have to own property A before I can sell it and perform a 1031 exchange with the proceeds of the sale?
Cheers,
Nick
Sorry NICK:
I Believe it to still be a 24 Month maximum period of deferrment to locate a satisfactory 'Like-Kind' property in order to avoid tax consequences.
Or sumthin' like that(???)
See your CPA and/or ask them to recommend a 1031 QI for you!
hope this helps!
Derrick
Thanks Derick,
I'll speak with my CPA, I have a meeting with her on Saturday... Thanks.
Nick
Quote:How long do I have to own property A before I can sell it and perform a 1031 exchange with the proceeds of the sale?
Nicolas,
Actually, the tax code does not specify a holding period for investment property before that property can be used as the relinquished property in a 1031 exchange.
The tax courts have ruled, however, that the relinquished property in a 1031 exchange must either be used in business or held for investment. Since your question started with purchasing property for resale, let's just consider the "property held for investment use".
The IRS has generally defined "property held for investment use" as property held for the production of income or future appreciation. Rental property -- property held for the production of income -- is the classic investment use that we will most often encounter.
Starting with this basic definition, then the IRS also differentiates property held for investment use from property held primarily for sale to customers. Property acquired for the express purpose of resale (profit) has been defined by the IRS as "inventory", or stock in trade. Your friend's rehab/flip property would be a example of stock in trade. Sales of stock in trade -- the classic rehab/flip transactions -- have also been called "dealer dispositions" by the IRS, which gives rise to the connotation of a dealer in real estate, though a "dealer" is really never defined in the tax code.
Unfortunately for your friend, stock in trade is not eligible to participate in a 1031 exchange because the property being relinquished does not have a qualified use.
Instead, all of the profits from the classic flip are taxable as ordinary income. If seller held financing is used to facilitate the sale, the taxpayer is not allowed to use the installment sale tax treatment either.
The IRS does have a 24 month rule for 1031 exchanges, but only if the relinquished property is sold to a related party. In this case, the relinquished property must be used for a qualified investment purpose for a period not less than 24 months, or the 1031 exchange is disqualified and the relinquished property sale is recharacterized as a taxable transaction.
The tax code is also silent on the question of how long an investment property acquired in a 1031 exchange has to be held before it can be used as the relinquished property in another 1031 exchange. I suggest that the taxpayer use the 24 month related party rule as a precedent here, and hold the acquired property for investment use for at least 24 months. More agressive tax advisors suggest at least 12 months of investmnet use, but none (that I have read) suggest that the acquired property can be immediately used in another 1031 exchange.[ Edited by DaveT on Date 01/01/2003 ]
DaveT,
Those where the answers I was looking for. Thank you for your response. I think I'll email this page to my friend, so he can get some of this information for himself.
Cheers,
Nick