How long is long enough to own an investment property?

By Jeff Quinn
Special to the Bonanza
May 9, 2008

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No, we’re not referring to the length of your tee shots, or whether your grass needs mowing, just yet. It’s a tax query, here, which we hear repeatedly.

Maybe you have this house which you’ve owned for a while. It’s been sort of a rental, sort of a second (maybe vacation) home. But you find one you like better. So what about the old place? Rent it out, maybe? Dump it, maybe? And then you bump in to your tax adviser on the golf course, and just having heard about the tax deferred “1031 exchange,” your radar goes up, as you think about a way to sell the old place and defer the tax bite.

You find out that in order to qualify for tax deferral under Internal Revenue Code Section 1031, you must have “owned and used” the property for business or investment purposes. But what does “owned and used” mean? How long must you have “owned and used?”

And for once, the Revenooers come to your rescue with some guidance. In a recent statement, they said, “The service recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, (we) provide taxpayers with a safe harbor under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment use under Section 1031 even though a taxpayer occasionally uses the dwelling unit for personal purposes.”

Welcome news, for a change, from Uncle Sam. Rich Uncle now pontificates that a dwelling unit which a taxpayer intends to be relinquished property under Section 1031 will qualify as property held for productive use in a trade or business or for investment if:
1. The unit is owned by the taxpayer for at least 24 months immediately before the exchange, and
2. Within the 24 month period, in each of the two 12 month periods immediately preceding the exchange —
a. The taxpayer rents the unit at a fair rental value for 14 days or more, and
b. The period of the taxpayer’s personal use does not exceed the greater of 14 days or 10 percent of the days rented.

So don’t worry; be happy that the IRS is giving you a little tangible advice for a change!

CONSULT YOUR TAX ADVISER - This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn is a shareholder in Ashley Quinn, CPAs and Consultants.