Q: Can I sell my duplex and purchase raw land?
A: Certainly. Properties involved in an exchange need to be held for either productive use in trade or business or for investment. Holding land for its future appreciation would be considered held for investment. Don’t get confused by the “like kind” requirement. “Like kind” can be any real property used for business or investment purposes within the U.S.
Q: Can I buy my replacement property first?
A: Yes. This requires that you do a reverse exchange. The reverse exchange may be an option provided it is structured according to the safe harbor guidelines.
Q: Can I move into a rental property that was originally purchased as part of a 1031 Exchange?
A: Yes. However, please keep in mind that the IRS will look at your “intent” in determining if your exchange is valid. If the IRS feels your original intent when the property was initially acquired was to use it as a primary
residence, you may have your exchange disqualified.
Q: Do I have to reinvest ALL of my cash (equity)?
A: No. However, any cash (equity) that is not reinvested in real estate will be taxable (and is known as cash boot). The general rule of thumb if you don’t want to pay any taxes, is to reinvest all of your cash and purchase a
property equal or greater in value.
Q: How long do I have to complete my exchange?
A: 180 days. However, also keep in mind you will be required to identify your potential replacement properties on day 45 of your exchange. Your timeline starts when you close escrow on the property you
are selling.
Q: Does my Realtor need to do anything special since I am exchanging?
A: Your Realtor needs to make sure the sales contract is assignable and include the appropriate 1031 Exchange language. Asset Exchange Company can provide the necessary language.
Q: How do I get my exchange started?
A: Call Asset Exchange Company once you’ve opened escrow. We’ll draft up an exchange agreement and coordinate with you and your escrow company to facilitate the exchange.
In Depth: Holding Periods for Exchange Property
How long do I have to own my relinquished and replacement properties before they qualify for 1031 Exchange?
Want the easy answer? The longer the better. Unfortunately, there is
no safe holding period for property to automatically qualify for a 1031
Exchange. Keep in mind, the properties only need to be “held for investment” to be eligible for an exchange. Time of ownership is only one factor the IRS looks at when determining if the properties were “held for investment”, thus qualifying for 1031 Exchange.
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:
- A holding period of 12 or more months means the investor will usually reflect it as an investment property in two tax filing years.
- In 1989, Congress proposed a one year holding period for both the relinquished and replacement properties. Although this proposal was never incorporated into the tax code, some believe it represents a reasonable minimum guideline.
Unfortunately, there is no easy answer as to how long a property must be held for it to qualify for an exchange, so make sure the intent when the property was acquired, was to hold it for investment purposes—and to be safe, hold it for as long as possible!
If you have any questions, or would like to schedule a consultation, please do not hesitate to contact Asset Exchange Company at 877.471.1031.