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How Does The IRS Determine “Held For Investment” In A 1031 Exchange?

One of the key requirements of a valid 1031 exchange is that the relinquished and replacement properties were “held for business or investment” purposes. Unfortunately, the IRS Code does not offer a brightline rule with regards to a period of time that satisfies this requirement.

Instead, time is but one of the factors that will be scrutinized when determining an investor’s intent with regards to property. Since every situation is unique, the responsibility falls to the individual investor to substantiate his or her intent.

Some of the factors an investor can use to substantiate intent include:

  • A long period of ownership
  • A use consistent with investment or business operations
  • Tax reporting history that is consistent with investment or business use

Likewise, there are certain factors that tend to negate the “held for investment” intent, including:

  • Sale of the property for profit shortly after acquisition
  • Using the property primarily for non-investment purposes

Since determination of intent is purely subjective, it is important for an investor to be able to clearly identify tangible evidence of his or her investment intent when it comes to defending a 1031 exchange.