When investing in real estate, many investors have different options based on their financial goals and level of involvement. 1031 exchanges have their advantages, including tax benefits and portfolio diversification. But what is the minimum holding period for 1031 exchanges?
How 1031 Exchanges Operate
1031 exchanges allow investors to trade investment properties for others, which allows for capital gains tax deferment. To perform a 1031 exchange, investors must find a like-kind property for replacement with equal or greater value. As such, investors can continue to grow their real estate investments without paying capital gains.
Types of 1031 Exchanges
There are four types of 1031 exchanges; delayed, simultaneous, reverse, and improvement. A simultaneous exchange occurs when investors relinquish a property, then acquire a replacement property simultaneously, involving a one-for-one asset swap between the investors and a secondary party. Delayed exchanges are more common, involving investors relinquishing their property before acquiring a replacement.
Reverse 1031 exchange is the opposite of delayed exchanges; instead of selling a property first and finding a replacement to close the deal, reverse exchanges involve buying the replacement property and selling the relinquished property. Lastly, improvement exchanges, known as construction exchanges, permit investors to upgrade the replacement property with exchange equity, suitable for those who want to acquire a replacement property that doesn’t meet their needs.
1031 Exchange Minimum Holding Period
While the 1031 exchange tax code doesn’t provide a specific time for holding an investment property, time isn’t as important as the investor’s intent during property acquisition. Additionally, investors must know that there is a required one-year minimum hold for 1031 exchanges due to the government’s multiple requests for a designated period. The IRS wants to see the one-year period due to code differences in long-term and short-term capital gains.
Sera Capital offers its services to individuals with highly appreciated assets and properties. We specialize our services in deferring capital gains tax, increasing passive income, and diversifying investment portfolios with professional fiduciaries. Our 1031 exchange services help convert 1031 real estate properties into securitized properties while deferring capital gains tax. If you have any questions about our fiduciary services, set up a free 30-minute phone call today.