The IRS code and 1031 exchange regulations are silent on the issue of time held. You must be able to show and take the position that the decision to exchange after your acquisition was not related to or a contingent part of the original acquisition. In other words, if there is any written evidence what-so-ever such as agreements, deposits or any other record showing intent to exchange the property once acquired, the proposed exchange of the property is dead - there is no way to qualify property acquired for resale.
To help, here is an excerpt from our 1031 exchange book. Notice in the example, the taxpayer attempted to qualify the property by holding it for a period of time as rental income property. The option was fatal to the exchange since it recorded the taxpayer's mind and intent at the time of the exchange. Even though the circumstances are somewhat different, the same rules still apply.
The step transaction doctrine embodies a general requirement that all steps, which are an integral part of the exchange, will be considered in determining the proper tax treatment for the exchange. The step doctrine may be applied by the IRS if
there was a pre-existing binding commitment to take each of the steps at the time the transaction was commenced, and
the steps were functionally interdependent in the sense the earlier step would have been unproductive without the later steps.
The step transaction doctrine may also apply if all the steps, although functionally independent, were contemplated at the outset of the 1031 exchange.
Example: You find a choice apartment house property for sale. You know of a buyer who would be willing to pay top dollar for the property. You decide to acquire the property and sell the buyer a two-year option to buy the property. In the meantime you will operate it as a rental income property. You currently own a commercial property you want to sell now but your accountant advises you need another capital gain this year like you need a hole in your head.
You enter into an exchange agreement to sell your commercial property and acquire the choice apartment house with the plan of selling the option, operating the property until the option is exercised, and taking your total gain in that taxable year.
The exchange will be disallowed and treated as a sale. Not only does the step transaction doctrine apply and collapse the exchange but also the act of selling the option at time of acquisition reclassifies the rental property as real estate held for sale in the ordinary course of business.
Related Info: replacement, time, option, steps, doctrine, transaction, sale