In order to qualify for a 1031 Exchange, the Relinquished and the Replacement Properties must have been acquired and "held for investment or for use in a trade or business." The amount of time that the property must be "held for investment or for use in a trade or business" is not specified in either the Code or the Regulations. Exchange Professionals generally recommend 1-year. The IRS has ruled that 2-years was adequate in a private letter ruling (Ltr Rul 8429039) but this was not made mandatory.
The position of the IRS is that if a taxpayer's property was acquired immediately before an exchange, or if the Replacement Property is disposed of immediately after an exchange, the property was not held for the required purpose and the "held for" requirement was not met.
There is no safe harbor holding period for complying with the "held for" requirement. The IRS interprets compliance based on their view of the taxpayer's intent. Intent is demonstrated by facts and circumstances surrounding the taxpayer's acquisition of ownership of the property and what the taxpayer does with the property. The courts have been more liberal than the IRS on these issues. Here are some examples of transactions that should be considered to have potential for a finding by the IRS that the "held for" requirement has not been met:
A cushion of time between events such as these is desirable in order to reduce the risk of possible “held for” issues in an exchange. In any event, the burden is on the taxpayer to support his compliance with the “held for investment or productive use in a trade or business” requirement.