Holding Period Requirement

Productive Use in Trade or Business or for Investment

Property that is the subject of an exchange must be held for a proper purpose: productive use in a trade or business, or for investment. In determining the use for which property is held, the key factor is how the Taxpayer intends to use it. Look to the intent of the Taxpayer at the time of the exchange, as well as the trade or business of the Taxpayer. The use by any other party is immaterial.

For example, the relinquished property may be a single family residence that the Taxpayer has rented to tenants. The purchaser of that property may intend to live in the property. The fact that the property is residential in nature or that the buyer intends to live in it is not relevant. All that matters is how the Taxpayer used (or will use) the property.

Vacation homes may qualify if the Taxpayer'­s use of the property is minimal (usually not more than 14 calendar-days per year). The property does not have to be rented. It can be considered "held for investment" even if the investment is solely for appreciation in the market value. Ltr Rul 8103117.

Mixed use property will also qualify. You must exclude the residential portion from the exchange, using any reasonable method to allocate the values. The gain on the residential portion may still be deferred under § 121. Make sure that you identify the specific interest, both as relinquished property and replacement property (e.g., "A 50% interest in 123 Main Street", not "123 Main Street").

Holding Period

The IRS also looks at how long the Taxpayer "held" the relinquished property prior to the exchange, as well as how long the replacement property was "held" after the exchange. Although there are no regulations on this point, except in the case of related party transactions which specifically require a minimum holding period of two years.  The IRS often takes the position that property owned for less than two years was not "held" by the Taxpayer within the meaning of § 1031. Most "experts" feel that a one year holding period is sufficient. The length of the holding period is a key element in determining the Taxpayer'­s intent. If the property is held for a relatively short period of time, there may be an inference that the property was held for sale, rather than for investment. Property held for sale does not qualify for non-recognition treatment under § 1031.

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