Do House Flips Qualify For 1031 Exchange?

You can do a 1031 exchange on property that you hold for investment or business purposes (such as a rental property). However, property that you hold primarily for re-sale (short-term house flips and rehabs) may not qualify for 1031 because you may be holding the property as your inventory to re-sell it.  Here's what you need to know about 1031 exchanges and flipping houses.

What is House Flipping?

Flipping is "the practice of buying an asset and quickly reselling it for profit” and the IRS may view your flip-property as being your “stock in trade or other property held primarily for sale” rather than held for investment purposes. Read the code section here.

§1031. (a) Nonrecognition of Gain or Loss from Exchanges Solely in Kind

1. In general, no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.

2. Exception - this subsection shall not apply to any exchange of stock in trade or other property held primarily for sale,

In a 1031 exchange, both your old Relinquished Property and your new Replacement Property must be held for the qualifying purposes of productive use in a trade or business or for investment. See IRS Publication 544.  

There are some ways to change your business plan so that these properties can qualify for 1031 exchanges, and I would be happy to talk with about how to do that.

• Start Your Exchange: If you have questions about house flips and 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Why Property Flippers Should Consider 1031 Exchanges

Property flippers are typically not able to 1031 exchange their property. However, property flippers may want to consider changing their tact and engaging in a 1031 exchange rather than a flip. In this article, we are going to talk about why property flippers should consider a 1031 exchange.

Flipped Property Does Not Qualify for 1031 Exchange

In a 1031 exchange, you want to move all of your equity from the sale of your relinquished property into other real estate that’s held for investment or business purposes. We often hear from people who want to flip a property. Unfortunately, flipped property generally does not qualify for 1031 exchange treatment because they are inventory.

The Tax Benefits of a 1031 Exchange

A qualified intermediary can be part of the solution by working with your accountant, attorney, and anyone else on your team to make the business plan such that you can move from being in a high effective tax bracket (like a flipper), to a low effective tax bracket (like someone who holds investment real estate).

When you 1031 exchange your property (and you do it correctly), you can defer 100% of your capital gains taxes on the sale of that property. That’s a huge incentive for property owners who can defer their taxes and exchange up into bigger and better property. It has the added benefit of being good for the economy as a whole.

Twin Cities 1031 Exchange Company

CPEC1031, LLC has been facilitating like-kind exchanges of real estate in the Twin Cities area for over twenty years. Our qualified intermediaries are on hand to help ensure you defer your capital gains taxes on the sale of investment real estate. We can answer all of your questions and guide you through the 1031 exchange process. Reach out to us today at our Minneapolis office to learn more about our service catalog and see how we can help you with your next 1031 exchange!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

House Flips & 1031 Exchanges

If you are a real estate flipper or rehabber, you are buying and selling properties primarily with the intent of reselling them. And if you're a buyer or a rehabber and you're doing a short term hold, you’re probably doing it in a fashion that is most tax inefficient, which means that you're going to get hammered with the most amount of tax. You're not holding these properties typically for long-term capital gains so you're in the short-term capital gains arena.

Changing your Business Model

Here’s a tax-saving tip -

• Change your business model from flip, flip, flip, to:

• Buy the property, fix it up, and rent it out for a period of time.

That way, instead of being a flipper you're an investor and you’re renting out these properties for a year or more. Now you can say to the IRS that you’re NOT holding these primarily for resale. You’re an investor in these properties and you want to do 1031 exchanges when you ultimately decide to sell that property.

Who can you sell the property to? Well if you have a tenant in the property leasing it, why not give them the springing option at the end of their 12 month lease that says if the tenant complies with all the terms and conditions of the lease they will have the exclusive right to purchase the property for x price.

1031 Exchange Advantages

The advantage for you is that you might have a potential buyer locked in from the outset. Also from a landlord management perspective, if the tenant thinks they have the prospect of buying the property from you, they are more likely to care for and treat the property as if it were their own. They won't be chopping vegetables on the countertop without a cutting board they’ll be careful to take care of those counters. So for many reasons flippers need to think about changing their business model and becoming investors so that they can avail themselves of the tax deferral under 1031 and go from being in the most tax inefficient to perhaps the most tax efficient, deferring those gain indefinitely, perhaps forever.

• Start Your 1031 Exchange: If you have questions about flipping property, tax efficiency and 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved