Properties held for investment purposes can be any property or asset that are acquired and held for income production (rental or leasing activities) or for growth in value (capital appreciation). In order to qualify for tax-deferred treatment, property must have been held for investment or for business use. Property held for resale (e.g. inventory such as for-sale condo units) typically will not qualify for tax-deferred treatment.
Properties held for investment qualify for a 1031 exchange. How long the property must be held to be considered “held for investment” isn’t clearly defined. A general rule of thumb is to hold the property for at least one year or maybe two. This will show intent to invest. Investors should work with their tax advisor or financial team to better clarify the holding period.
Since there is no absolute holding period on such property, it is possible to hold it for less than a year and still show intent to invest. However, that may be more difficult and require more evidence during any audit. The investor doesn’t want to end up with a property “held for sale” as the property will not be eligible for a 1031 exchange.
In addition to avoiding a held for sale status, the investor must not use the property for personal use. Holding the property for investment will allow the investor to take various tax deductions. Deductions include mortgage interest and insurance, depreciation, and property taxes (on investment land). Depreciation must be calculated using the IRS-specified Modified Accelerated Cost Recovery System (MACRS) method.
