Dec

15

can i use a 1031 exchange for flipping houses?

Filed Under Home :: Real Estate 

macmo187 asked:


how long do i have to hold onto the property to use a 1031? what requirements are there to use a 1031?

Renee
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    • Comments

    No Responses to “can i use a 1031 exchange for flipping houses?”

    1. heyteach on December 16th, 2010 7:41 pm

      My understanding is no.

      “Qualifying Property - Certain types of property are specifically excluded from Section 1031 treatment: property held primarily for sale; inventories; stocks, bonds or notes; other securities or evidences of indebtedness; interests in a partnership; certificates of trusts or beneficial interest; and choses in action. In general, if property is not specifically excluded, it can qualify for tax-deferred treatment.
      Proper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer’s personal residence will not qualify. ”

      Another requirement for a 1031 is a proper intermediary. You need a 1031 Facilitator or 1031 Accommodator. You might want to look for one and just verify that a flip is a no-go on a 1031.

      While not a typical flip, if you would occupy the house for a year or two, you probably could do 1031s, but whenever you’re dealing with the IRS you want someone to address the absolute specifics of a deal before you get caught short.

    2. v b on December 16th, 2010 7:58 pm

      Houses you have purchased to rehab and flip are INVENTORY.

      Inventory is not eligible for a like kind exchange.

      You cannot fix this by moving into one of the properties.

      The gain on a flipped house is Self-Employment income, not capital gain, so it’s never going to qualify for a 1031 exchange.

    3. Mary B on December 20th, 2010 4:27 am

      You have 180 days from the date of the last closing to the next closing to avoid the tax, and it must be INVESTMENT TO INVESTMENT home to avoid the tax.

      Keep in mind, there is NO loophole in the tax law on that issue…it is staightforward and clear.

      If you miss it by ONE DAY, you’ll not only owe the tax, but the penalties that go with it.

      A CPA will be the best person to explain it to you further.