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Q. What does "held for investment" mean?
A. You may only exchange property "held for productive use in a trade or
business or for investment" for like kind property "to be held either
for productive use in a trade or business or for investment." IRC 1031(1).
Our clients frequently want to know whether a given property has been "held
for investment." You may want to review our notes on ~"What is Like
Kind Property?"
It is helpful to note that property is not held for investment if it is the
taxpayer's residence, or if it is the taxpayer's inventory. Thus, if you sell
your home, you cannot generally do an exchange. But, see our notes on "Can
my residence ever be part of an exchange?" You may, however, be able to do
a Residential Rollover of Basis using IRC 1034 to avoid paying capital gains
tax. But, generally speaking, your residence is not considered an investment for
the purposes of an exchange.
Inventory is not "held for investment." Thus, a builder cannot
generally exchange homes he has built for lots or raw land, although builders
can, under certain circumstances, perform exchanges.
The question of whether real estate is "held for investment" is one
of intent. What was the taxpayer's intent in acquiring it or holding it? This
can be a question of proof, and an attorney or accountant can assist you in
making sure you can prove you had the required intent. Other exchange services
will not give you legal or accounting advice, and will expect you to sign a
waiver saying they did not give you such advice. Get sound advice from a
licensed professional!
See our notes on How long must I hold real estate for
investment to qualify for exchange treatment?
Rice & Stallknecht, P.C. would be honored to
assist you.
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