A lot of real estate investors have questions about the replacement property holding period in a 1031 exchange. In this article, we are going to clarify the tax implications of holding the replacement property in a 1031 exchange.
Holding the Replacement Property
When conducting a 1031 exchange, you have to “Hold” the Replacement Property for investment or business purposes in order to satisfy the requirements of IRC Section 1031.
How long you must hold the property is an open question, but the safe answer is probably two years, particularly if you are considering eventually doing something inconsistent with using for investment or business purposes…like moving into the property as a residence or gifting it away.
The IRS has not issued a bright line holding period, but there is a safe-harbor for rental pool properties that tests each of the two years after an exchange to see if it is primarily used for rental-pool purposes as opposed to personal use.