Qualified Use

All property used in the 1031 Exchange must follow specific guidelines to qualify.  The property must pass the Qualified Use “test” in order to qualify for a 1031 Exchange.  The property must be held for rental, investment, income, or be used in trade or business to qualify.  Properties held for personal use, primary residences, or purchased to flip or remodel and sell once repairs are completed may not qualify. The tax law is written around the word “intent”.  The intent to hold for investment purposes is critical for passing the qualified use requirement.  The taxpayer must be able to demonstrate that they had the intent to hold the property for rental, income, investment or used in trade/business. 

The specific time period is left vague by the IRS.  One option to dismantle any ambiguity in the taxpayer’s intent is to hold the property for an extended period.  Many tax advisors recommend holding it for at least two tax returns, which generally means more than 12-24 months.  Again, the IRS has left this time period ambiguous.  Holding the property for less than 12-24 months does not automatically mean it would not qualify. 

It is important to understand that the burden of proof lies on the taxpayer to “prove” their intent to hold. GB 1031 Exchange always recommends consulting with a tax advisor in regards to the property intended for use in an exchange.