IPX1031 Insight Blog

Options if Your 1031 Exchange Property Has Been Impacted by COVID-19

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Some taxpayers who recently completed a 1031 Exchange by purchasing an investment property just prior to the start of the pandemic have witnessed a drop in revenue and/or property value. In some cases the value drop due to the economic conditions caused by the pandemic is so steep that the taxpayer’s best business option may be to sell the property to avoid further losses.

Even if the property that the taxpayer needs to sell has lost value, there is a reasonable likelihood that there will be tax consequences. Accordingly, it may be beneficial to defer those taxes through a new 1031 Exchange.

Since the property was held for only a few months, some taxpayers (and their CPAs) familiar with the 1031 rules worry that selling and attempting a new tax deferred 1031 Exchange for a property that they recently purchased in a prior 1031 Exchange may be problematic if they are audited.

Section 1031 provides that both the relinquished and replacement properties in a 1031 must be “held for” investment or business use. The statute (and the 1031 regulations) do not provide a specific time period to satisfy the “held for” requirement. Taxpayers who complete a 1031 Exchange by buying a replacement property with the bona fide (and provable) intent to hold it for investment purposes or for the productive use in a trade or business, should satisfy the “held for requirement” of Section 1031. Accordingly, that property may be eligible to be sold as part of another 1031 Exchange, even if the ownership period is short because the requisite intent is present.

What is prohibited is an attempt by a taxpayer to conduct a 1031 Exchange relating to property that is held as inventory. If the taxpayer’s intent is to exchange into a replacement property that they plan to immediately “flip”, taxing authorities are likely to challenge the validity of the 1031 Exchange in an audit.

1031 Exchanges can be a taxpayer’s best friend in good times and bad. Knowing these 1031 rules can make a huge economic difference for the taxpayer. Make sure you discuss your individual situation as well as the eligibility for a future 1031 Exchange with your tax advisor!

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IPX1031 focuses solely on 1031 Tax Deferred Like Kind Exchanges. As the national leader in 1031 Exchange services, IPX1031 has the financial assurances, security and expertise essentials to protect your funds and provide answers and guidance throughout the exchange process. For more information or to discuss your specific 1031 tax deferred exchange situation, please contact us.

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