There are a number of reasons why exchangers are confused on this issue. The first reason stems from the fact that neither the IRS nor the Regulations provide a comprehensive definition of the phrase “held for investment.” (The regulations do state, however, that unproductive real estate held by a non-dealer for future use or future appreciation, is held for investment.) The second reason is that many investors have been given incomplete, or worse, incorrect answers with respect to the holding period issue. Keep reading for a better understanding or feel free to message or call us (1-800-USA-1031) with your questions! We’d love to discuss the circumstances of your exchange with you.
There is no finite holding period for property to automatically qualify as being “held for investment.” Time is only one factor at which the IRS looks in determining the Exchanger’s intent for both the relinquished and replacement properties. In the event that an exchange even ever came into question, the IRS may look at all the facts and circumstances of an investor’s situation to determine the Exchanger’s true intent for both properties involved in the exchange. Ideally, an investor would have a variety of ways to support their claims of intent to hold for investment purposes.
In one private letter ruling (PLR 8429039), the IRS stated that a minimum holding period of two years would be sufficient. Although a private letter ruling does not establish legal precedent for all investors, there are many advisors who believe two years is a conservative holding period, provided no other significant factors contradict the investment intent. Other advisors recommend that Exchangers hold property for a minimum of at least twelve months. The reason for this is twofold: 1) a holding period of 12 or more months means the investor will usually reflect it as an investment property in two tax filing years; 2) in 1989, Congress had proposed a one year holding period. Although this proposal was never incorporated into the tax code, some believe it represents a reasonable minimum guideline.
The investor’s “intent” in holding both the relinquished and replacement properties is the central issue. Each Exchanger and their advisors should be able to substantiate that the relinquished and replacement properties in a tax deferred exchange were acquired and “held for investment.” The actual time a property is held is largely a further reflection of an exchanger’s “intent”.