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
- 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.
- 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.
- 1031 Hotline: 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.
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