How Long Do I Need to Hold 1031 Property?

How Long Do I Need to Hold 1031 Property

Now that the sales of Real Estate have ticked up, the question becomes can I 1031 Exchange new properties held less than one year? The big question the IRS asks is intent. What was your intent with the property and do you intend to make this a long term hold? Unfortunately for us, the IRS does not tell us exactly how long to hold property to qualify for 1031 exchange treatment. The one thing the IRS does tell us is that they do not like property to be exchanged if it was held for resale. So basically they are saying if you buy a piece of property and you put a sign up in the front yard, this will not qualify and then you buy another property and flip that one.

Again it goes back to intent. If properties are held for speculation they can qualify for 1031 exchange treatment. So if I buy a property on foreclosure and fix it up (which takes 3 months), and then I list it and sell it, and I want to buy a long term rental, can I do a 1031? I have doubled my money on the sale of the foreclosure, and my intent is to keep my money in real estate. Again the answer is grey but I would consider discussing an exchange as long as the client holds the property long term. I would say the long term is at least 2 years.

The reason I say the long term is 2 years plus, is that there is a recent Revenue Procedure discussing holding property for 2 years. That makes me think that is what the IRS is thinking. Typically if your property fits perfectly into the 1031 box (say a pure rental), I would say 1 year is long enough to hold a property for an exchange, again as long as your intent is to stay in real estate and not cash out.

Feel free to contact Midland 1031 with any questions at (239) 333-1031.

For information regarding real estate investments within an IRA or other retirement account, contact Midland Trust at 239-333-1032 or visit www.midlandtrust.com.

1031 Exchanges for Farmers: Livestock and Equipment

1031 Exchanges for Farmers - Livestock and Equipment

Many farmers do not realize the enormous benefit that a 1031 Exchange can afford them. 1031 is the tax code section that allows owners of investment or business assets to exchange (and buy up in value) which will result in a deferral of all taxes. Farmers and Ranchers can exchange land as long as the replacement property is held for investment.

Many farmers do not take advantage of a section of the code in 1031 that allows them to defer the tax on sale of livestock and business assets like tractors. Livestock can be exchanged as long as it is held for investment. The most common types of livestock include breeding stock and milking cows. There are some specific rules regarding livestock. Livestock exchanges must be of the same sex and typically the farmer cannot exchange between breeds (i.e. milking cows are not equal to beef cows).

Farmers can also exchange equipment. Usually this means tractors, machinery or irrigation equipment. For assets to be exchanges for other personal property in a 1031, they must be of the same general asset class or product class. The IRS has identified the asset classes they believe are like kind with detailed description of classes (NAICS).

A recent exchange included a farmer with a stud bull valued at $20,000. The stud was exchanged for two younger bulls valued at $22,000 (for both). The farmer paid $5,000 for the original bull and had 2 useful season breeding with him. The bull was owned in a C Corp and would have had to pay tax of $5,250.00 but with the 1031 no tax was due that year.

Farmers have three useful assets to exchange in a 1031 that can save them thousands of dollars in taxes. If you would like more information on a 1031 exchange, please call Midland Trust at (239) 333-1031.

Please note there are several rules that need to be followed in a 1031 exchange. Please request our 1031 Exchange Guide for more information and consult your tax advisor.