"HELD FOR INVESTMENT" -- WHAT'S THAT?
The actual wording of Internal Revenue Code §1031 says that in order to qualify for tax-deferred treatment, the property owner must sell property that has been "held for productive use in a trade or business or for investment" (emphasis added) and purchase property of like-kind. Often, potential exchangers want to know how long they have to own property to establish that it has been "held for investment." Unfortunately (or perhaps fortunately), neither the IRS nor the Regulations gives us a complete answer on that subject. If some specific time frame were established, it would certainly be an easier question to answer. On the other hand, if there were a specific time frame prescribed, the exchanger would have no possibility of building a case for the disposition of property held for less than the prescribed amount of time. So, although not setting out an exact period of ownership required creates some uncertainty, if it can be established that the property was indeed held for investment, the current state of no guidance actually provides greater latitude to the potential exchanger. The only thing we can say with certainty is the longer a property is held, the less likely it is to be questioned.
So what's the taxpayer supposed to do? If his true intention is to hold the property as an investment, he would automatically take actions that would help establish that intent: He might run ads in the local paper. He might place For Rent listings on Craigslist and other online services. He might distribute flyers to local places of business. He might hire a property manager. He would maintain the property in a manner consistent with preserving his investment. He would essentially treat the property as the investment that it is. By keeping copies of ads, records of actions taken, and the like, the intent to hold the property as an investment can be verified if questioned in the future.
Now let's imagine that an opportunity to sell that he cannot pass up happens to arise after a short period of ownership. If that happens, he can sell with the knowledge that he has made every attempt to establish his intention to hold the property as an investment. There is no guarantee that the IRS agent on the other side of the table will agree with him, but he stands an infinitely greater chance of success with some documentation on his side than without.
WHAT'S THE PREVAILING THOUGHT ON TIME OF OWNERSHIP?
In the exchange industry, it is pretty widely accepted that ownership for a period of two years should qualify for tax-deferred treatment. A one year period of ownership is less accepted, but still believed by many to be adequate.
The key factor as to whether a property qualifies for an exchange should be pretty obvious by now--it's the INTENT of the taxpayer at the time of purchasing the property. If the intent was to hold the property for investment, and if it can be adequately substantiated, let's get the exchange paperwork started.
© IOWA EQUITY EXCHANGE