Let’s address a very common question that arises after you purchase your replacement property, let’s say you’ve recently completed a 1031 exchange.
You sold your relinquished property in Austin, Texas and acquired a replacement property in Houston, Texas and only 6 months have passed since you purchased the replacement property, and you’re thinking about doing another 1031 exchange for a higher valued property somewhere in the State of Texas or anywhere else in the Union. To answer the question, the Internal Revenue Code doesn’t state clearly a holding period, tax professionals often recommend waiting at least 2 years before doing another 1031 exchange. Some advisors suggest a shorter timeframe, such as 1 year, depending on your tax history and situation. The intent is what matters more in this situation, if you were to sell your replacement property within a year of purchasing it, you would have to prove to the IRS, if questioned, that you were planning on holding the property for investment reasons but then ended up selling it because you received an offer that you did not market for or any other reason that proves your intent.
Holding a property or any investment for 1 year or more is considered a long term investment and anything shorter than 1 year is considered a short term investment. This holding period emphasizes the importance of leasing the property and maintaining tenant occupancy over a 2-year period. The rent rolls and financial documentation will serve as vital proof of investment intent, bolstering the legitimacy of the exchange in the eyes of the IRS.
However, if you held the property for less than a year and did some repairs on it and put it on the market for sale immediately, your replacement property will not be eligible for a 1031 exchange given that your intent was to flip it.
It is important to consult with your CPA and/or tax attorney prior to engaging in a 1031 exchange under the above described circumstances