When doing a 1031 exchange, the basis of the original property transfers to the new property. But does the holding period also transfer over?
A client has done a 1031 exchange, and then wants to sell the new property within one year from the date of the exchange. My thought is that he should still qualify for long term capital gain treatment, but I haven't been able to find verification.
Can anyone help clarify this for me?
Thanks.
I believe if you did NOT make the election to treat the property as a new acquisition under 1.168(l)-(6)(l) the holding period tacks along with the basis.
Thanks Bruce. I don't do returns so wasn't aware of that election.
I think that the IRS will take the position that this is a "fix and flip" transaction and disallow the 1031 exchange. I.e., the short holding period shows no intention to hold the property for investment or use it in a trade or business.
Thanks Alan - excellent point.
Surely there must be more to this analysis. A short time period alone is not the whole story.
It's not the whole story, but it's close. For a 1031 exchange you have to exchange investment property for investment property. If you sell newly acquired property too quickly, the IRS conclusion is that it was to sell, not for long term investment.
I disagree. Just because you relinquish property #2 "too soon" is not the entire test. It may raise the IRS eyebrows, but they have to look at the entire picture. You can very well hold property for a short time and still have its purpose be investment. And I think your use of the term "long term investment" is rather gratuitous here, perhaps just a slip of the tongue.
See "
Thank you for proving my point:
The differing opinions of the IRS, courts and legislature reveal that the determination of whether a property is held for investment will be made on a case by case basis, taking into consideration all of the facts and circumstances that apply to the Taxpayer's particular situation. If audited, the Taxpayer will have the burden of proving that his intent, when he purchased the replacement property, or came into title in the relinquished property, was to hold the property for investment. Time is just one factor that the IRS and courts will consider in determining the Taxpayer's intent and a Taxpayer's purpose can change while he holds the property. In general, the longer a Taxpayer holds property, the easier it will be to prove investment intent, but Courts have approved of exchanges when the relinquished property was held for only five days (See Allegheny County Auto Mart v. C.I.R. 208 F2d 693 (1953)) and disapproved of exchanges when the replacement property was held for six years (Klarkowski v. Commissioner, TC Memo 1965-328, affd on other grounds (7th Cir. 1967) 385 F2d 398).
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