If a real estate investor bought a property for $475,000 and sold it a month later for $700,000, they would most likely tell you that it was a great investment. That same investor would probably tell you that good fortune struck twice if they also deferred paying the capital gain tax on their profits when they sold the property by utilizing a 1031 Exchange.
Unfortunately the investor may later discover that this quick sale did not qualify for tax deferral under Section 1031. However, there are instances when holding an investment property for a short time will qualify. How do taxpayers know if a quick sale will qualify for the tax deferral treatment? The key factor is what the taxpayer’s intention was when the property was purchased.
If the taxpayer’s intention at the time of purchase was to hold the property for investment purposes or for productive use in the taxpayer’s trade or business and was not intended “primarily for sale,” a 1031 Exchange treatment may qualify. For example, if an investor buys a building with the intention of holding it for investment and receives an incredible unsolicited offer a few months later, that transaction will probably qualify for 1031 tax deferral treatment. Be aware that although most properties owned by developers, builders and rehabbers generally are considered to be held “primarily for sale,” the IRS looks to the intent of the investor/taxpayer in every situation.
Intent is a fact and circumstance test involving a number of factors. Factors that the IRS looks at to determine the presence (or absence) of a qualified intent include:
The time factor alone, or how long the property was held by the taxpayer prior to sale, is not what determines intent. Intent involves a number of factors that will be taken into consideration. Taxpayers are always advised to consult with their tax and legal advisors regarding the exchange status of a property prior to selling their property.
We, at IPX1031®, pride ourselves on not only being the industry leader in expertise, service and security, but we also strive to help our clients and their advisors keep current on tax issues pertaining to §1031 exchanges and applications for them. We aim to be your complete information resource. For more information about us, our complimentary webinars about 1031 exchanges, or to initiate an exchange, visit our website at www.ipx1031.com
Disaster Relief: Presidentially Declared Disaster Area: Severe Storms, Tornadoes, Flooding, Landslides and Mudslides: Kentucky
Victims of the severe storms, tornadoes, flooding, landslides, and mudslides that took place beginning on April 2, 2015, in parts of Kentucky may qualify for tax relief from the Internal Revenue Service. The postponement extends the time until July 31, 2015.
For more information on how these extensions relate to 1031 Exchanges, read our IPX1031® brief exchange: