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There is no designated amount of time that you must hold a property before converting its use, but the IRS will look at your intent. You must have had the intention to hold the property for investment purposes. This could include, but does not require, renting the property out at a fair market value. Since the government has twice proposed a required hold period of one year, we would recommend seasoning the property as investment for at least one year prior to moving into it. A final consideration on hold periods is the break between short- and long-term capital gains tax rates at the year mark.

While it is a bit more complicated, it is possible to use exchange funds to purchase a property being auctioned off. The IRS requires the Exchangor to provide an unambiguous property description if the property is not acquired prior to the 45th day of the exchange. For this reason, the auctioned property must be purchased prior to the 45thth day unless property descriptions are available prior to the auction.

To fully defer all taxes in a 1031 Exchange it is necessary to carry all equity from the relinquished property forward into a new replacement property. If, through the exchange, some or all of the proceeds from the relinquished property sale are used merely to pay down an existing mortgage, the Exchangor would have tax exposure on the funds received. Even if the Exchangor acquires new replacement property meeting the necessary value and debt requirements, the funds pulled out of the exchange to pay off the unassociated debt would have tax exposure.

A successful 1031 Exchange requires that property be exchanged. Contractual rights and obligations pertaining to real property may or may not be characterized as a property interest and may or may not be eligible for an exchange.

Although IRC 1033 and 1031 both allow for the deferment of capital gain on property, the code sections operate and impact the taxpayer differently. IRC 1031 may provide more flexibility on the type of replacement property that can be acquired. IRC 1033 offers more flexibility on time constraints and receipt of funds.