1031 Exchanges And Holding Time

Comments(4)

• 
  DaveT2nd January, 2004

  Could you give a little more detail about your acquisition and exit strategy?
  
  Do you own the property you plan to sell on lease option, or are you in the middle of a sandwich lease. If you own the property, how long have you owned it and how was it used while you owned it?

• 
  bgrossnickle2nd January, 2004

  I bought the house two months ago. I hold the title and a currently rehabbing. Plan on lease/optioning the house. Just wondering how long it must be leased before I can let them exercise the option for it to qualify for a 1031.
  
  But besides L/O, what are the "rules" or acceptable guidelines for how long you must hold a property and how that property must be used to qualify for a 1031.
  
  Thanks
  
  Brenda

• 
  DaveT2nd January, 2004

  Brenda,
  
  I take a very conservative approach in answering this question. Others may be more aggressive and give you a different answer.
  
  The IRS uses a facts and circumstances test on each transaction. If the only business you do is lease options, sandwich lease options, or assignments, then you are dealing in real estate. As such you are engaged in a business whose product (inventory, or stock-in-trade) just happens to be real estate. In the absence of a business entity, your income and expenses would be reported on Schedule C and your self-employment taxes would be calculated on Schedule SE. My answer stays the same whether you do one deal per year or one deal per month.
  
  When you engage in a buy-rehab-then immediately resell on a lease option deal, you are not purchasing property for the production of income (as though you were the owner-landlord for property you own), but instead, are really acting as a dealer to real estate. You report your income and expenses on Schedule C and compute your self-employment taxes on Schedule SE.
  
  Option consideration paid by the tenant-buyer is simply "on deposit" and no tax treatment applies until the option is exercised or the option expires. If the option is exercised, option consideration received is added to the contract sale price of the property. If the option expires, then the individual receiving the option consideration has realized a short term capital gain, while the individual giving the option consideration has realized a capital loss.
  
  Because the property in your investment strategy is never considered "investment" property according to the IRS definition, it is not eligible to participate in a 1031 exchange.
  
  As always, the foregoing reflects my personal opinion and is presented for information purposes only. This information should in no way be construed as either tax or legal advice. Please consult a tax professional for specific details.

• 
  bgrossnickle2nd January, 2004

  Thanks for the info.
  
  Brenda