A 1031 Exchange allows you to defer capital gains taxes when selling investment real estate, provided you reinvest in a qualifying replacement property. But once you’ve acquired that replacement, a common question arises:
How soon can I sell it again?
It’s an important question—one that could determine whether you retain the tax benefits from your original exchange. At Realized, we specialize in helping investors navigate these rules while supporting their long-term wealth goals.
Let’s take a closer look.
The “Holding Period” Rule in a 1031 Exchange
You might be surprised to learn that the Internal Revenue Code doesn’t define a strict minimum holding period for a 1031 exchange property. Instead, what matters most is your intent.
To qualify for full tax deferral, both the relinquished and replacement properties must be held for “productive use in a trade or business” or for “investment purposes”—not for personal use or immediate resale.
If you sell your replacement property too soon, the IRS could argue that you never intended to hold it for investment, which could invalidate the exchange and trigger retroactive taxes.
So, What’s the Safe Holding Period?
While there’s no formal rule, many tax advisors recommend holding a 1031 property for at least two years. Here’s why:
- Twelve months is often considered the minimum to demonstrate intent, but it may not be sufficient in an IRS review.
- Two years provides stronger evidence of long-term investment intent, especially if the property is later sold in another 1031 exchange or a standard sale.
- If you plan to personally occupy the property or change its use, the two-year holding period becomes even more critical.
Exceptions to the Rule
Life happens, and the IRS recognizes that. Certain circumstances may allow you to sell earlier without losing the exchange’s tax benefits:
- The property owner passes away.
- The property is condemned or subject to involuntary conversion.
- There’s a major change in your investment strategy.
While personal hardship or a change in investment plans may be relevant in an audit, these are not formally recognized exceptions and should be discussed with a tax professional. That said, documentation is essential. If you must sell early due to unforeseen events, be sure to document your original intent to hold the property as an investment.
What If You Need to Sell Your Property Again?
If you’re planning to sell your replacement property and roll the proceeds into another 1031 exchange, that’s typically allowed.
At Realized®, we regularly assist investors with back-to-back exchanges designed to support tax deferral strategies and long-term portfolio planning. Vehicles such as Delaware Statutory Trusts (DSTs) can offer fractional ownership, professional management, and structures that may facilitate future exchanges.
The Bottom Line
After completing a 1031 Exchange, flipping your new property too soon can jeopardize your tax deferral. The rule of thumb? Hold the replacement property for at least two years, unless exceptional circumstances apply.
At Realized, we work closely with investors and advisors to develop tax-efficient strategies that align with both current needs and future goals.
Considering your next move?
Reach out to Realized to build your exit strategy and how it may fit into your broader investment property plan.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
