The reply is yes, supplied you know the law in depth and prepare accordingly. But first some background.

A 1031 exchange is a great way to create wealth by saving significant taxes on the sale of investment home by reinvesting the untaxed product sales proceeds in a substitute (investment) property inside of the IRS specifications of Part 1031 such as the applicable regulations, rulings, and tax court situations. A single of these demands is that the properties in the exchange need to be held for investment or business use. This requirement is acknowledged as the “holding requirement”. The IRS interprets this “holding requirement” to indicate that the relinquished and replacement property need to be held for a specific time period. Therefore conventional pondering is that a speedy flip of a home will not qualify for the tax deferral rewards of a 1031 exchange, because of this exchange holding requirement.

But this is primarily based on IRS interpretation which does not have the force or impact of law. (The IRS does not have the authority to make laws; only congress does). Accordingly, the tax law does not give any specific, goal time period requirement. In other words, there genuinely is no statute as to how prolonged a property must be held ahead of it qualifies as held for investment. A full-blown discussion of the track record of all of this is beyond our scope. Nonetheless here is an overview of some bottom-line suggestions to aid you qualify for 1031 tax-free treatment method on quick gross sales.

one. Know the tax law citations that assist fast revenue as exchanges. There are quite a few cases. One particular is Rutherford, where the transfer was immediate. Others can be reviewed with a capable 1031 exchange specialist.

two. Prevent becoming a dealer specially by documenting investment intent. This was discussed in a one more post titled, Will Wholesaling Make You a Dealer?

3. Hold the purchased alternative home for at least two many years below the “Economic Unit” and “Continuity of Investment” doctrines > the foundation of qualifying exchanges. This is a powerful indicator of investor standing, even on the quick promoting facet of the relinquished house. Explanation: These basic theories indicate that the relinquished and alternative properties are with each other as a single unit exactly where there is a lengthy time period of ownership and a quite strong argument for investment intent and investor position. Therefore, below these doctrines, the lengthier holding time period of the keeper replacement home must carry about to the short “flip” period of the relinquished house. Dating back to the 1920′s, these doctrines are foundational and therefore a effective defense in opposition to the IRS. (I know, as I have effectively utilized them in opinion letters for IRS examinations.)

four. Audit-Evidence your exchange by audit proofing your taxes. If there is no audit there are no concerns and no be concerned. “Audit-Proofing” (not finding audited) is the very first rule of tax-reduction planning. Fully grasp that nothing getting completed right here is illegal, but is primarily based on legal positions. So even though you are taking like positions, you still have the genuine proper to employ audit proofing measures. One such step is to report all house transactions (which includes exchanges) on partnership type 1065. At the existing time, partnership returns (kind 1065) are audited much less than other kinds such as Schedule E and corporation returns, 1120 or 1120S. (Due to the fact of its numerous tax drawbacks, you need to not maintain genuine estate in any type of corporation, anyway.) You ought to also appropriately comprehensive form 8824 which is the certain IRS routine for reporting 1031 exchanges. It is a supporting routine to tax reporting varieties (these kinds of as form 1065) and is the only exchange type that really goes right to the IRS. The full and exact filing of 8824 would mostly probably reduce your possibilities of an audit. You also need to engage a Certified Intermediary (QI) that specializes in complex exchanges, like as individuals mixed with quick gross sales.

Al Aiello is a national speaker specializing in Wealth Protection teaching dynamic techniques on tax reduction, IRS audit-proofing, entity structuring and asset protection targeted for genuine estate traders and company owners. Al will be talking at the Connecticut Real Estate Investors Association, or CT REIA, Month-to-month Meeting on April 19, 2010 in Cromwell, CT. irs audit defense