Recent Tax Court Case Affirms 1031 Exchange Intent
A recent 2012 Tax Court case,
which allowed a coupleto move into their 1031
replacement property eight months after the purchase, will once again excite
those investors who focus on intent, rather than a
minimum holding period to qualify for a 1031 exchange.
Section 1031 says that to be eligible to do an exchange, you
have to have intent to hold the property as an investment, and
if your intent is to hold the property for resale, you're not
eligible to do an exchange. The problem with all this is that Section 1031 does
not define the terms intent, investment or
resale.
A large body of investors and investment advisors hold that if
your intent is to hold the property for a profit, then you qualify for a 1031
exchange regardless of the holding period. Over the years we've dealt with
attorneys and CPAs who insist that if you have a profit intent, you should be
able to exchange a property that you've owned for as little as a day or
two.
Not surprisingly, since the code section does not define these
important terms, there is a fairly large number of court cases with taxpayers
and the IRS fighting over this issue, and taxpayers win just enough of them to
keep the hope alive.
In this most recent court case, the taxpayers sold
an apartment house and exchanged into single-family rental. For eight months
they tried unsuccessfully to rent the house and then were forced by financial
problems to sell their primary home and move into the rental house. The IRS
subsequently disallowed the exchange, and the couple took it to tax court where
they were able to convince the judge that their efforts to rent the property
were substantial and their financial problems legitimate.
The court typically rules that you have to hold the property for
two tax years in order to qualify for an exchange. Since January 1st to January
1st is two tax years (as is December 1st to January 1st) the IRS informally
considers 366 days as the minimum holding period to meet the investment
definition. 366 days, or "a-year-and-a-day," meets the two-tax year court
definition, but it also meets the minimum holding period requirement to qualify
for the more preferential tax definition of a long-term capital
gain.
This information is from the 1031 Exchange Experts 1-866-694-0204
For more information regarding property on
Marco Island and
Naples, please call me at 239-404-7471 or visit my
website.
