Holding Period [Tax Q&A]

Death & Taxes

Holding Period

By Roy Lewis
January 15, 1999

When I respond to questions in the Tax Strategies message board, I often use the term "holding period." Because I've been in the tax business longer than I care to admit, I just assume that everybody knows what a "holding period" is and how it is defined. Perhaps I assume a bit too much. So this week let's take a brief look at what "holding period" actually means, and how it is applied in various situations.

In general, a property's "holding period" is the length of time that you have held (or it is treated as having been held) such property. Well, that certainly makes sense, doesn't it? The calculation of a property's holding period is a fundamental component of the tax treatment of capital gains and losses, because the capital gain and loss provisions of the Internal Revenue Code distinguish between short-term and long-term gains and losses. The correct classification of gains and losses is essential to the correct calculation of your net capital gain or loss and the determination of the limit on your capital losses. That is why the "holding period" is such an important concept.

As I have pointed out many times in the past, and as you can read in my article on capital gains taxes here in the Taxes FAQ area, long-term capital gains are now taxed at lower rates than ordinary income. As the law is currently written, an asset has a long-term holding period if it has been held, or is deemed to have been held, for more than one year.

To compute the holding period of property, you begin counting on the date after the day you acquired the property and stop counting on the day that you dispose of it. But, you don't merely count out 365 days. Nope. Instead, you use that first day as a "benchmark" for each succeeding month. You then use that "benchmark" to determine your sale date, and your ultimate holding period. If you have held the property for more than one year, your gain or loss is a "long-term" capital gain or loss. If, on the other hand, you have held the property one year or less, your gain or loss is a "short-term" capital gain or loss.

Example: You bought 100 shares of Company XYZ on January 1, 1998. For purposes of determining your holding period, you would start counting on January 2. The second day of each month thereafter counts as the beginning of a new month, regardless of how many days that month contains. If you sell the property on January 1, 1999, your holding period will be one year or less and you will realize a "short-term" capital gain or loss. If, on the other hand, you sell the property on January 2, 1999, your holding period will have been one year and a day, and you will realize a "long-term" capital gain or loss. See how it works?

Here are some examples of investment property and the specific rules regarding the calculation of holding periods that apply to each:

1. Securities traded on an established market: For securities traded on an established securities market, the holding period begins the day after the trading date on which you buy the securities and ends on the trading date on which you sell them. You ignore the settlement date for holding period purposes. The TRADE date controls.

2. Nontaxable trades: If you acquire new investment property in exchange for old investment property (such as in a tax-deferred exchange), the holding period begins on the day after the date the original (or old) property was acquired.

3. Real property: If you purchase real property under an unconditional contract, you begin counting on the earlier of the day you received title to the property or the day after you took possession and assumed the incidents of ownership. Taking delivery or possession of real property under an option to purchase, however, is not enough to start the holding period. The holding period cannot start until there is an actual contract of sale. Likewise, the holding period of the seller cannot end before that time.

4. Gifts: If you receive a gift of property and your basis in the gift is figured by using the donor's basis (such as in the gift of appreciated stock), then your holding period includes the donor's holding period. This is known as "tacking" the holding period. Why? Because your holding period "tacks on" to the original donor's holding period. If, however, your basis in the gift is determined by the fair market value of the gift, your holding period starts on the day after the date of the gift.

5. Inheritance: In general, if you inherit investment property your gain or loss on any later disposition of such property is treated as a long-term gain or loss regardless of how long YOU may have actually held the property. This being the case, you are considered to have held the inherited property for more than one year even if you dispose of the property within one year of the decedent's death.

I hope the above will help you compute your holding period for all of your assets. As always, if you have additional question on this or any other tax issue, please visit the Tax Strategies message folder and leave your question there.

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