A
recent 2012 Tax
Court case,
which
allowed a couple to move into
their 1031 replacement prop-
erty eight months after the pur-
chase, will once again excite
those investors who
focus on
intent,
rather
than a
minimum hold-
ing period
to qualify
for a 1031 exchange.
Section 1031 says that
to be eligible to do an
exchange, you have to
have intent to hold the property
as an
investment
, and if your
intent is to hold the property
for
resale
, you’re not eligible
to do an exchange. The prob-
lem with all this is that Section
1031 does not define the terms
intent, investment
or
resale
.
A large body of investors and
investment advisors hold that
if your intent is to hold the
property for a profit, then you
qualify for a 1031 exchange
regardless of the holding pe-
riod. Over the years
we’ve dealt with at-
torneys and CPAs
who insist that if
you have a profit in-
tent, you should be
able to exchange a
property that you’ve
owned for as little
as a day or two.
Not surprisingly, since the
code section does not define
these important terms, there
are a fairly large number of
court cases with taxpayers and
the IRS fighting over this issue,
and taxpayers win just enough
of them to keep the hope alive.
In this most recent court case,
the taxpayers sold an apart-
ment house and exchanged
into single-family rental. For
eight months they tried unsuc-
cessfully to rent the house and
then were forced by financial
problems to sell their primary
home and move into the rental
house. The IRS subsequently
disallowed the exchange, and
the couple took it to tax court
where they were able to con-
vince the judge that their ef-
forts to rent the property were
substantial and their financial
problems legitimate.
I’m sure that the
intent pun-
dits
will applaud this outcome
as further proof that intent ar-
guments can win the day for
them. I think this view is short-
sighted because they overlook
the tremendous cost of going to
tax court, and the fact that the
odds that are stacked against
them once they get there. By
my unofficial count, taxpayers
have only won maybe 10% of
these cases.
The court typically rules that
you have to hold the property
for
two
tax years in order to
qualify for an exchange. Since
January 1st to January 1st is
two tax years (as is December
1st to January 1st) the IRS in-
formally considers 366 days as
the minimum holding period
to meet the investment defi-
nition. 366 days, or “a-year-
and-a-day,” meets the two-tax
year court definition, but it also
meets the minimum holding
period requirement to qualify
for the more preferential tax
definition of a long-term capi-
tal gain.
What I tell my clients is that
while there are taxpayers
who’ve won the battle with
the IRS over a short holding
period based upon intent, if
you’re adamant about doing
an exchange on property that
you’ve owned for less than a
year-and-a-day, you better be
prepared to go to war with the
IRS because they will chal-
lenge short holding periods.
Is it really worth spending the
next 3 years looking over your
shoulder?
. . . the intent
pundits will
applaud this
outcome as
proof that
intent can win
the day ... this
is short-sighted
because they
overlook the
tremendous cost
of going to tax
court . . .
By Gary Gorman
founder, The
1031 Exchange
Expert’s; LLC
We Moved!
The 1031 Exchange Experts’ llc
hopped over I-25 and are now
located at
5445 DTC Parkway,
Penthouse 4, Greenwood Vil-
lage, CO 80111
. Everything else
is the same, including our will-
ingness to answer all your 1031
questions. -GG
Gary Gorman
is the
founder and owner of
1031
Exchange Experts’ LLC
,
an independent national
qualified intermediary. A
retired CPA, Gary is the
author of the best-selling
1031 exchange book:
Exchanging Up!
, and a
contributor to numerous
publications, including
Forbes, The Wall Street
Journal, Bloomberg’s
and
The New York Times
. He’s
also a contributing author
of books by Donald Trump
and
Rich Dad/Poor Dad
author Robert Kiyosaki.
He can be reached at
or nationwide, toll free at
866-694-0204.
c l a r i t y
You’ve met them. The ‘wise men’ who use the big, fifty-cent
words to impress you with their ‘knowledge’ (so-called). A
REAL
wise man once said,
unclear communication is the
result of unclear thinking.
We at The 1031 Experts agree.
We LOVE to see our client’s ‘light go on.’ We take difficult
1031 concepts and make them easy for our audience to
understand. We make the complicated simple
.
We do this because we want your business.
Call us!
We want to be your 1031 Qualified Intermediary.
September 16-October 6, 2015 —
COLORADO REAL ESTATE JOURNAL
— Page 23AA
