I have a tax question. It is my understanding that for the revenue from the sale of a property to be taxed as capital gains rather than normal revenue I must hold it for a year. It is the same in order to avail myself of making a 1031 exchange. I buy over the counter tax delinquent properties, and normally between the time I am told the sale of the property to me has received approval several months go by before I receive the deed. So at which juncture does the year start ticking?
This isn’t tax or legal advice, but from what I understand, the 1-year holding period for capital gains and 1031 eligibility starts when you get the deed, not when your purchase gets approved. The IRS considers you the owner when the property is legally yours - which happens at deed recording, not during the approval phase.
This matters a lot with these properties since there’s often months between approval and actually getting the deed in hand. I keep detailed records of all these dates just to be safe.
Also, I think the 1031 only works if you’re holding the property as an investor, not a dealer
Anyone else dealt with this timing issue on OTC properties? How’d you handle it?
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You better get good CPA help. You are probably classified (or should be) as a dealer rather than investor. This kills 1031 and cap gains treatment
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I agree with Matt as to timing and also as to the 1031 exchange. If you want to hold a few personally or through another entity, they might qualify as personal property, not dealer property. But check with your CPA to make sure your strategy will pass muster.
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Also, there is no written rule for a one year hold for a 1031 exchange. It all depends on what your “intent” was at the time of purchase.
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I’m a CFP so I’m somewhat familiar with this issue. Matt is correct. 1031 is based on holding the property as a long-term investor. So for example, let’s say you have a parcel of land that you buy with the intent to landbank it. You then decide several years later that it’s time to sell and move on to another investment. That could be 1031 eligible, but I would check with a CPA. 1031s are more common it seems to me with income producing properties. Also, unless you’re flipping big-time properties, I would think the administrative costs for a 1031 would be too burdensome.
I also believe (and please someone correct me if I’m wrong), that the holding period doesn’t apply to dealers. If it’s your intent to flip the property, you’re paying the full tax rate since it would be classified as inventory on your balance sheet and tax forms (not long-term investments or PP&E).
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