Conservative advice still recommends that the same taxpayer should hold the property transferred and the property acquired for a substantive period of time. It is generally recommended that the taxpayer hold the property before and after the exchange for twelve months. However, it is interesting to note that a six-month holding period was discussed in 124 Front Street, Inc. v. Commissioner, Boise Cascade Corporation, and R.R. 61-119.
Whether property is used for personal use, use in a trade or business or for investment is determined by the actual use of the property at the time of the exchange (see Heiner v. Tindle, 276 U,S. 582 (1928). In Klarkowski, 385 F. 2d 398 (7th Cir. 1967), the Court recognized that for tax purposes the nature or character of property may be different at the time of acquisition than at the time of exchange. Therefore, a taxpayer may attempt to convert his residence to an investment or income-producing property prior to an exchange by moving out and renting the property.
The success of this strategy would depend upon the length of the rental, the substance of the transaction, the existence of a pre-arranged exchange, and the taxpayer's complete documentation of their rental efforts (for example, newspaper "for rent" ads, listing for lease, written rental agreements, etc.). How far a taxpayer can go in arranging his transaction to qualify as a tax-deferred exchange under Section 1031 is not clear. However, the courts have held that the mere fact a taxpayer did make such arrangements for tax avoidance purposes is not sufficient to disqualify the exchange. (Halpem v. U.S., Carlton v. U.S., and the Mercantile Trust Company v. Commissioner, 32 BT A 82 (1935).)
In Land Dynamics, 78,259 P-H Memo TC (1978), the court found that the mere holding of property for several years does not establish an intention to hold such property for investment purposes. The real problem in these situations is building and retaining sufficient circumstantial evidence to prove the change in holding in a subsequent audit. In spite of the emphasis on the taxpayer's intent at the time of the transaction, the taxpayer's activities and the surrounding facts and circumstances, both before and after the exchange, have been clearly examined by the courts. Subjective intent at the time of exchange is difficult to determine, thus, collateral evidence is essential.
In 124 Front Street, Inc. v. Commissioner, 65 T.C. 6 (1975), the taxpayer held the property for approximately six months prior to the successful exchange but collected rents, paid for insurance, incurred expenses for maintenance of the property, and claimed a depreciation deduction on his tax return.
In Boise Cascade Corporation., 74,315 P-H Memo TC (1974), the taxpayer was successful in that the IRS stated that the exchange property was held for the purpose of use in a trade or business despite the fact that it was sold six months after the exchange. In addition to time, the courts have traditionally considered the following factors on a taxpayer-by-taxpayer application: