How Long Do You Have to Hold a 1031 Exchange Property? (2-Year Safe Harbor Explained)

**The information on this web page is provided for informational purposes only and should not be considered as legal, tax, financial or investment advice. Since each individual’s situation is unique, a qualified professional should be consulted before making financial decisions.**

It should be said right off that there is no definitive answer to how long, only inferences. With real estate §1031 exchange activity accelerating, more investors are asking that question.

We’ll argue here that asking how long in terms of months and years is the wrong question from the start. That is, how long you must hold property is a function of how much time you needed to substantiate true investing intent.

The emphasis here will be on proactive approaches for meeting your investment goals while mitigating risk. The key is adopting a clear roadmap starting pre-exchange for establishing true intent. We’ll help with that and also better prepare you to decide whether to go it alone or retain professional services.


How Long Do You Have to Own a Property Before You Can Do a 1031 Exchange?

From all indications, the core issue for the IRS is whether taxpayer intent is to hold properties for productive use in a trade or business or for investment. Regarding specifying holding periods in terms of months/years, IRS rules can’t arbitrarily prescribe or interject them without enabling legislation. Safe harbor rules are the best the IRS can and has done.

IRS regulations state that real estate held by a non-dealer for future use or future appreciation is held for investment. With that, establishing intent is the central issue regarding both relinquished and replacement properties.

The holding period before sale is just one of several components bearing on intent. Both explicit and circumstantial factors are indicators of intent for holding the property. The initial challenge is defending your intention at the point of exchange for holding the property for productive use in a trade or business or for investment. Regardless of time owned–six months or six years–the burden of proof is on you.

Nonetheless we’ll cover the various holding period arguments, explaining what suppositions they’re predicated upon. It’s instructive to learn how practitioners and tax advisors have approached this question. You’ll gain perspective regarding the landscape on which this debate has unfolded in over decades.

Also be mindful that intent may change post-exchange due to work, health, family, or other unforeseeable circumstances. Events such as the pandemic may dictate a reassessment. The Courts have acknowledged such occurrences may legitimately impact holding periods.

In the court case of Patrick A. Reesink and Jill Mitchel Reesink, Petitioners v. Commissioner Of Internal Revenue Respondent (TC Memo 2012-118) the Commissioner found that the Reesinks (taxpayers) initially intended to hold rental property 3-4 years as an investment. Then due in part to the substantial illness-related loss of income, the taxpayer moved into the rental property after only eight months following the exchange. Nonetheless, the Court held in favor of the taxpayers.

The respondent (IRS) had only disputes whether the petitioners held the replacement property with investment intent at the time of the exchange. Note that no challenge to the eight months holding period was offered.

Again, without statutory authority the IRS can’t raise a specific holding period except to argue that short ones reflect poorly on taxpayer intent. In this case the judge cites Moore v. Commissioner, T.C. Memo. 2007-134:

We have held that investment intent must be the taxpayer’s primary motivation for holding the exchanged property in order for the property to qualify as held for investment for purposes of section 1031. [emphasis added]

With motivation being the focus, ideally you’ll take overt actions starting pre-exchange. It involves laying circumstantial groundwork commensurate with what investors would typically undertake in your situation. Steps to take and actions to avoid while bolstering your case for true intent will be outlined here in the last section.

We’ve said there’s no definitive answers to how long, just inferences. Given that, it’s not surprising that there’s no consensus among legal and tax professionals. Related IRS issuances leaning toward encouraging the two-year argument while court decisions (Reesink and others) have allowed far less wait times.

Absent statutory authority, none of the publications cited next specify waiting periods. Congressional action and court cases regarding the holding periods are scarce, as well. For the following arguments, these few pronouncements have been assigned to one of three camps where practitioners and tax advisors tend to reside.


Two-Year Holding Argument

Revenue Procedure 2008-16 is a safe harbor procedure (specifics set forth in the next section) that requires relinquished property be held as an investment for at least 24 months immediately prior to the exchange. As the IRS acknowledges, this provision is intended to provide comfort. It doesn’t set the bar, but if your priority is to eliminate the holding period as a potential issue, this has you covered.

Private Letter Ruling 8429039 validates the two-year measure. In part that 1984 IRS ruling reads:

In this case the Trust will exchange rental real property for other real property which it will hold as rental property for a minimum of two years. This is a sufficient period to ensure that the residence to be acquired will meet the holding period test prescribed by section 1031 of the Code, which requires that the property received by a taxpayer be held either for productive use in a trade or business or for investment. [emphasis added]

This ruling validates the two-year holding period but hardly precludes shorter ones.
Other likely more important intent indicators remain open for review, of course. But it’s a good start especially If the wait does no harm. You’ve removed one potential audit flag.

That’s about it for the two-year argument. As promised, there would only be references but the IRS has no statutory authority to set mandatory wait periods.


One-Year Holding Arguments

Through HR 3150, in 1989, Congress proposed both relinquished and replacement properties be held for one year to qualify for tax-deferred treatment. While proposed, this timeline was never incorporated into the tax code. Some consultants think though that it represents a reasonable minimum guideline.

Some practitioners recommend at least a twelve-month holding period, which allows investors to report on these investment properties over two tax filing years. This has merit in that it reflects positively on intent, which is the key goal for enhancing exchange approval.

Michael Lantrip, Attorney/Accountant/Investor, claims there’s an implied statutory holding period of at least one year and a day. He links the long-term capital gains definition to the §1031 holding period. There’s no indication the IRS will adopt this position, nor does it appear to have been widely endorsed.

That’s the one-year case in a nutshell.


Less Than One-Year/None Holding Arguments

In the case of 124 Front Street, Inc. Petitioners v. Commissioner of Internal Revenue Respondent (65 T.C. 6, 1975) while the tax court referenced the taxpayer’s six-month holding period, it approved the exchange nonetheless.

The case of Patrick A. Reesink and Jill Mitchel Reesink, Petitioners v. Commissioner of Internal Revenue Respondent (previously cited) the tax court held that eight months under special circumstances was long enough. An excerpt from his ruling reads:
… investment intent must be the taxpayer’s primary motivation for holding the exchanged property…

The US Court of Appeals in Allegheny County Auto Mart Petitioner v.Commissioner of Internal Revenue Respondent – 208 F2d 693 (1953) the court approved the exchange even when the relinquished property was held for only five days.

The owners of 5860 Baum Boulevard executed a deed dated January 2, 1948 conveying that property to the petitioner … The petitioner conveyed that property to Marcus by a deed delivered January 7, 1948. [emphasis added]

In Revenue Rulings 84-121, 77-337 and 57-244, the IRS concluded immediate turnovers were primarily indicative of dealing properties acquired for resale at a profit, not investment. Still you’ll find professionals arguing that in some situations no wait time will be required. It’s all a question of whether taxpayers can substantiate true intent.

In general, we find no prohibition on initiating exchanges in less than two years from the acquisition date. With a solid case for investment intent on record, any risk appears low. Be careful that reasons for not waiting don’t impugn intent. Indications of tax avoidance motivations, e.g., could jeopardize the exchange.

From the above arguments, there are only three areas of certainty:

  1. Intent with the ability to support it is key
  2. Revenue Procedure 2008-16 safe harbor rules are a de facto release precluding the IRS from interjecting any waiting time implications. It’s a head start in substantiating true intent.
  3. Turning over exchange properties just acquired immediately are problematic at best. For very quick turnovers a plausible defense is likely needed. Some unforeseen major event, e.g., that suddenly necessitates a change in intent.

In summary, what’s apparent to us is none of these three options fits all situations. Each exchange has its own dynamics. You’ll need to access them and at an opportune time–all factors considered–initiate the exchange.

Not the most critical, the holding period must be included in the mix as one indicator of true intent. In that regard, how urgent is timing? If it’s somewhat urgent, you’ll want to weigh an early turnover against the relative strength of your case for true intent.

With a solid case for intent, the risk on audit, if ever there was one, would be low. As cited earlier in the Moore case, … investment intent must be the taxpayer’s primary motivation … . That’s the litmus test. If you demonstrate that convincingly, the holding period won’t be a disruptive factor.

Worst case, if litigation is an option for you, tax courts have been the most lenient in under two-year holdings cases. They’ve focused on other issues, some circumstantial in nature.

Included are:

  • Any evidence of tax avoidance motives.
  • Indications of purpose(s) when assets were acquired.
  • Existence of explicit plans and contracts drafted pre-exchange.


If you’re comfortable with such issues, case law is very much on your side.

Bottomline: presently, the IRS cannot interject specific waiting periods due to the current absence of statutory authority. After all, that’s why in 1989 Congress proposed a one-year waiting period (never enacted). An important observation made in the Introduction is

… how long you must hold property is a function of how much time you needed to substantiate true intent.

At whatever point in time you are confident that true intent has been established, exchanges are an option.

Need help? Seeking professional advice may be prudent if you have questions or concerns regarding the many §1031 requirements and how to execute them successfully.


How Long Do You Have to Rent a 1031 Exchange Property After a 1031 Exchange?

Once again, there’s no set standard holding period when renting out your investment property post-exchange. Again, anything less than a year could prove problematic. Not because of any statute or regulation but as holding periods shorten the bar for substantiating intent rises. Unless an apparent fault lies elsewhere in the exchange, IRS approval is de facto under safe harbor rules.

In Revenue Procedure 2008-16, Section 1. Purpose reads:

This revenue procedure provides a safe harbor under which the Internal Revenue Service (the “Service”) will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of § 1031 of the Internal Revenue Code. [emphasis added]

Here the IRS prescribes a succinct two-year safe harbor rules. Adherence to the following rules eliminates tax exposure regarding the exchange’s holding period. As always, your initial intent can’t be anything but an acquisition for productive use in a trade or business or for investment.

1) You must own the replacement property for at least 24 months immediately following the exchange.
2) For those 24 months, in each 12-month period you must:

  • rent that property at fair market value (FMV) for 14 days or more and
  • limit using §1031 exchange property for personal residence to under 15 days or 10% of days during the 12-month period that the property is rented at FMV.


But of course, these rules aren’t mandated. That would require Congressional action. If you are risk-averse or in no hurry, the wait may make sense. Some practitioners contend one year is long enough with two tax returns on file reporting rental property income. Does this sound familiar?

In general, the previous section’s discussion on holding period rules and pronouncements, applies here as well. As does the enjoinder, the longer the holding period the better for substantiating intent. Unforeseen events make shorter holding periods more plausible, decreasing the risk of IRS audits.

Finally, it’s on you and any advisor’s judgement when to convert the rental property. There’s no legally enforceable mandate. Strictly on the holding period issue, it’s weighing the odds on a sliding scale: two-year de facto approval with ever increasing risk of audit as the holding period shortens.

Note: The IRS Tax Code requires §1031-acquired personal residences be held for at least five years before selling them using the $250K/$500K §121 exclusion. Learn more about this in the article How Can You Do a 1031 Exchange on a Primary Residence? on our sister resource dedicated to residential real estate investing —


What Other Factors Does IRS Consider to Deem Your Investing Intent Valid?

The IRS continues to focus on intent. Like a broken record repeating this disclaimer at the end of numerous clauses if those properties were held for productive use in a trade or business or for investment.

With that reality, whenever possible, you should be signaling intent well in advance of an exchange. You should take good faith actions reasonably expected of a true investor. Conversely, avoid actions investors would likely shun.

As you go, be sure to record and save exchange and related documents. Take notes of events, names and places. Unanticipated evidence may move judges as the upcoming Reesink illustration will show.

Here’s a list of dos’ and don’ts to support true intent.

  • Don’t make a quick move to convert a rental property into a primary residence after a §1031 exchange.
  • Don’t take any preparatory action toward moving in soon.
  • Don’t prematurely disclose any plans to move into the property.
  • Demonstrate efforts to rent out the property at fair market value with advertising, listings, and other efforts made for marketing your commercial property.
  • Be prepared to show how you arrived at the rental’s fair market value.
  • Do rent it out (preferably not to a relative) if at all possible to avoid the risk that just offering won’t be enough.
  • Confirm that there’s no covenant or other impediment to renting out the property.
  • When applicable, be prepared to show how a significant, unforeseeable event resulted in a change in intent.
  • Maintain settlement and all other related documents bearing on your intent to invest.
  • Enlist your Qualified Intermediary, broker, and consultant to help maintain a paper trail of actions and events supporting intent.
  • Take notes (a log perhaps) of events, places, dates, conversations, et al. Substantiating intent by its very nature is elusive and may take unexpected twists. Take the Reesink case where petitioners’ fifteen year old (at the time) son carried the day with his testimony. The presiding judge states on page 16:


Perhaps the strongest indicator of petitioners’ intent at the time of the exchange comes from respondent’s witness–Michael Reesink. He testified that Mr. Reesink had told him on several occasions that petitioners planned to sell their personal residence and move to Guerneville once their children were out of high school.

Who would have thought family interactions would prove pivotal in a judge’s decision? It’s impossible to predict what may ultimately prove relevant in an audit or court hearing. So within reason record and save documentation associated with the exchange.

As an investor, it’s wise to anticipate what will be needed to satisfy any IRS information requests. Record and save documents into perpetuity. Note potential witnesses, even recruit them to observe your posted “for sale signs. Take time-dated pictures on them. Page 15 and 16 on Reesink reads in part:

Moreover, we do not determine petitioners’ intent on the basis of their financial position because we find the trial testimony of Mrs. Reesink, Richard Reesink, and Scott Wright to be credible. Mrs. Reesink testified that she never discussed moving to Guerneville until after the exchange had been completed, and petitioners believed they were in a financial predicament. Richard Reesink testified that petitioners were having a hard time renting the Laurel Lane property and that he was surprised they sold their primary residence. Finally, Scott Wright testified that he visited the Laurel Lane property with the intention of renting it. [emphasis added]

How do you avoid being labeled a dealer rather than an investor? Certain activities raise IRS concerns. Making improvements to land with roads and utilities, e.g., is a red flag. Here are some common questions you would expect to face on audit or at a court hearing.

  • What is your work occupation(s)?
  • How suitable is the property as a rental in the first place?
  • What support do you have showing intent for the initial acquisition?
  • What support do you have showing intent for subsequently holding and sale of the property?
  • What improvements if any have you made to the property?
  • How many other properties if any do you hold or have sold?
  • If so, under what circumstances were they brought and disposed of (include any brokers’ listings)?


These inquiries are aimed at intent for holding relinquished and replacement purchases. Each exchange must be approached with qualifying intent that carries through the holding period (except when unforeseen events or circumstances intervene) to final disposition. Lots of hoops to jump through. With these exchanges rising in popularity, we should expect IRS’ compliance efforts to increase as well.

Good reasons to consider a §1031 exchange abound. Maybe your goal is reinvesting sale proceeds you save by deferring capital gains and depreciation recapture taxes. Maybe the aim is to consolidate properties or trade up for better investment returns. Or perhaps you’re shifting investments to another business sector or locale.

Without doubt, §1031 exchanges are a tax-efficient strategy for preserving your capital. To make it work efficiently for you, we suggest you contact a tax professional for assistance.


How to Ensure Your Exchange Is Legal and Safe?

Unless you are conducting a simultaneous exchange, you must use services of a qualified intermediary. A professional, competent, and experienced 1031 exchange company with income tax experts on the team will advise you on when and how it’s best to conduct a 1031 exchange so that the tax authorities will not have a reason to doubt your investment intent.

The professionals will consult you on all factors and procedures that must be considered before and after doing a 1031 exchange. They will ensure that the procedure is completed legally, in compliance with all IRS rules.

PropertyCashin is an all-in-one platform for commercial real estate investors that maintains relationships with top-rated 1031 exchange firms in all locations of the USA. To get connected with the best professionals and have your exchange processed safely and effectively, fill out the form below.

About the Author
Sam McGrath

As the Lead Commercial Real Estate Analyst at PropertyCashin, Sam McGrath is responsible for the company’s national sales strategy. Prior to his position with the company, Sam served as a Surface Warfare Officer in the United States Navy. Further, Sam was the National Recruitment Manager at Maxim where he expanded the Maxim healthcare brand nationally. He has over 8 years of experience in creative real estate investing. In addition, Sam has bought and sold commercial and residential property in over 42 states. Sam has a bachelor’s degree in business administration and marketing from Texas State University.

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