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What is a 1031 Exchange Holding Period, Part 2

Today we will expand upon Holding Periods and how they pertain to 1031 exchanges.

A holding period, as we defined last week, is simply the period of time one owns an asset before disposing of it. The holding period begins on the day following the day the asset is acquired and concludes on the day the asset is disposed.

The holding period is one of the tests given to a property to determine whether or not the property will qualify to be replaced through a tax-deferred exchange. The holding period will help to identify properties that were used for rental purposes, investment purposes, or use in a trade or business, which are the only permissible uses of property that will qualify as the relinquished or replacement property in a tax-deferred exchange.

Though it is not specifically stated in section 1031 of the Internal Revenue Code, the common understanding is that the IRS will not question the eligibility of a property that has been held for investment purposes for at least two years. Likewise, it is commonly understood that a replacement property should be owned and used for investment purposes for at least two years in order to avoid an IRS challenge to the validity of the 1031 exchange. While some may suggest 12 months is a long enough holding period, two years is the more conservative standard that will reasonably reflect the owner’s intent to hold the property for investment purposes.

Following these holding period guidelines not only allows investors to complete uncontested 1031 exchanges, but also gives them other options for their properties. For example, once the two-year holding period has been met, ownership of a replacement property that is owned through a partnership can be transferred from the partnership to co-tenancy between the individual partners without invalidating the exchange. Also, replacement properties can be converted from properties used for investment purposes to properties used for personal purposes once the two-year holding period has been met. The most common example of this is a rental home that the investor wishes to use as a vacation home or a primary residence. Likewise, a vacation home or primary residence that is converted into an investment property and used that way for two years could then become eligible for an exchange when it is relinquished. For more in-depth information on exchanging vacation homes see: Vacation Homes & 1031 Exchanges.

Flipping properties can be a profitable real estate investment tactic. However, flipped properties cannot qualify for an exchange because they are typically taxed based on regular income tax rates as a result of their short-term nature; therefore, there are no capital gains taxes to defer. Furthermore, flipped properties do not meet the use requirement of an exchangeable property because they are not held and used for rental purposes or in a business or trade.

Paying attention to the holding period of any real estate investment will help you determine how to manage your property to best take advantage of tax deferral benefits.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.

What is a Holding Period?

At 1031 Crowdfunding, we always strive to define the commonly used, but not-often-explained details of Delaware Statutory Trusts and 1031 Exchanges. Today we will look at Holding Periods.

10 Reasons to Consider a DST 1031 Exchange - Part 2

Last week we listed 5 reasons why we keep talking about Delaware Statutory Trusts. Here are 5 additional reasons we believe DSTs have become so popular among 1031 exchange investors:

10 Reasons to Consider a DST 1031 Exchange

A Delaware Statutory Trust or DST is a separate legal entity created as a trust under Delaware Statutory Law. A DST allows you to co-invest with other investors in one or numerous properties. Although DSTs aren’t new, current tax laws have made them popular among 1031 exchange investors.

Vacation Homes & Tax Deferred 1031 Exchanges

1031 Exchange for Vacation Homes

Do you have a vacation or second home that doesn’t get used very often anymore? Have you considered replacing that home with something new?

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