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Real Estate Holding Periods: How Long Should You Keep Your Investments?

Before you make any real estate investments, it's important to consider your time frame.


[Updated: Feb 04, 2021] Dec 06, 2020 by Matt Frankel, CFP
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While it's not necessary to approach an investment with a specific holding period in mind, it's a good strategy to give at least some thought to how long you plan to hold onto it. For example, if you'll need to cash out of your investment within a year or two, it could mean that you need a significantly different strategy than if you had a decade or more.

In this article, we'll take a closer look at real estate holding periods for various types of investments, tax rules you need to know to maximize your returns, and more.

How long should you plan to hold real estate investments?

There's no perfect answer when it comes to the optimal holding period for real estate investments, but here are some guidelines for some of the most popular investment types.

REITs - Technically speaking, you can buy shares of a real estate investment trust, or REIT, and sell them a few seconds later if you want to. REITs are highly liquid and can be bought and sold with the click of a mouse. On the other hand, like most other stock investments, REITs are best suited for long-term investors, as there are simply too many factors that can influence a REIT's share price over short periods of time. I typically advise that it's not a great idea to invest in REITs unless you're planning to hold the investment for at least five years.

Rental properties - There is technically no minimum hold period when it comes to rental property investing, and it's entirely possible (and in many cases profitable) to sell a rental property within a year or two of buying it, especially if you're in a hot real estate market. However, it's generally not a smart idea to buy and sell an investment property quickly, as sales commissions and other closing costs can dramatically eat into your profits. For example, assuming commissions and closing costs will be 7% of your sale price, if you buy a property with a cost basis of $200,000, you'll have to sell it for at least $214,000 just to break even.

Crowdfunded real estate investments - Crowdfunded commercial real estate investments are unique in the sense that you have virtually no control over your holding period. Most deals have a target hold period (typically anywhere from three to seven years), but there's no guarantee that the investment will actually produce an exit in that time frame. In most cases, there is no secondary market for crowdfunded investments, so before you decide to buy a partnership interest in one of these investments, be aware that they are highly illiquid and your capital is likely to be committed for the duration.

Tax implications of real estate investment holding periods

Here's one of the most important things to keep in mind when it comes to holding periods for real estate investments. Unless you're holding them in a tax-advantaged retirement account like an IRA, it's important to note that the length of time you hold a particular investment determines how your profits are treated by the IRS.

Specifically, any profit on an investment you owned for more than a year is treated as a long- term capital gain, which gets favorable tax treatment. Depending on your income, long-term capital gains are taxed at a rate of 0%, 15%, or 20%, but the rate a taxpayer pays will always be lower than your ordinary income tax bracket.

On the other hand, a profit on an investment held for a year or less is a short-term capital gain and is taxed as ordinary income.

As an example, let's say you invest $10,000 in a REIT, and after exactly one year the investment has grown to $15,000. We'll say that you're in the 32% marginal tax bracket, which would put you in the 15% capital gains bracket. If you sell your investment after holding it for exactly one year, you would pay a 32% tax rate on your $5,000 profit, or $1,600. On the other hand, if you hold for just one more day, your tax rate would be 15% and you'd have capital gains tax liability of just $750. That's a big tax benefit and something to keep in mind if you're right around the one-year mark.

The Millionacres bottom line on real estate holding periods

As you can see, there is no one-size-fits-all rule when it comes to holding periods, but the general idea is that real estate investments are best suited for long-term investors. Unless you're fixing and flipping houses for quick profits, it's a smart idea to plan on a holding period of at least a few years when investing in real estate.

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