What are the requirements for a Section 1031 exchange?

by Kevin Just, CPA 

How long must I hold property before I can do a 1031 exchange?

Internal Revenue codes and regulations do not state a specific time that property must be held for a Section 1031 exchange. The most important issue is the intent of holding and not the period of holding. The property must be held for "use in a trade or business or for investment" and exchanged for like property. Your question would involve what amount of time is necessary for property to be considered held for such purpose. It is clear from IRS rulings that if property is acquired specifically to make an exchange, it is not held for the required purpose, regardless of the time it is held. In other words, you can't just buy property and not do business on it.

A significant number of conflicts between taxpayers and the IRS involve exchanges of property distributed from a related entity. In a 1988 Tax Court case, partners liquidated a partnership and soon thereafter exchanged the property. In this case, the taxpayers were allowed the exchange, but the court did not address the issue of the partners' intent for the short period between the time of partnership liquidation and the time of exchange. In a similar 1983 case, the IRS claimed that property immediately exchanged following a corporate liquidation was not "held" for the required purpose after the exchange. The court could find no requirement of a time period for property to be held and ruled against the IRS. The IRS appealed in the Ninth Circuit, which affirmed the Tax Court's ruling. In the Ninth Circuit's discussion on the ruling, the court explained that "the intent to exchange property for like-kind property satisfies the holding period requirement because it is not the intent to liquidate the investment or use it for personal pursuits." Based on this information, it would seem that if property is held for any period, however short, and there is no intent to liquidate the investment or use it for personal purposes, then it may be exchanged.

Kevin Just is a San Jose, Calif., CPA with the firm of Just, Gurr & Associates. You can reach him at (408) 271-2700.

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