1031 Exchange Warnings for House Flippers

House flipping is the act of buying a house for the purpose of quickly reselling it at a profit. It is a common strategy used by many real estate investors. But can a flipped property be used in a like-kind exchange transaction? This article is all about 1031 exchanges and house flippers. Specifically – whether or not you can utilize a 1031 exchange for property that has been flipped.

Do House Flips Qualify for 1031 Exchange?

All 1031 exchange property has to be held for the right purpose – that is, for use in your trade or business, or for investment. As a result, property that is primarily held for re-sale (i.e. a flipped house) may not qualify for 1031 exchange treatment. In essence, if you try to do a 1031 exchange with a property that you just bought and flipped over the course of a few months, the IRS is likely to flag that 1031 exchange as inappropriate.

There are, however, strategies you can use to circumvent this and potentially use flipped property in a 1031 exchange transaction. For example, if you rehab a property and then rent it out for several years, you could likely use it in a subsequent 1031 exchange.

Exchange Your Property

A 1031 exchange is one of the best ways to defer capital gains taxes when selling property in the United States. If you are considering the tax-saving benefits of a 1031 exchange, your first step should be to contact a qualified intermediary who can help you through the proceedings. The 1031 exchange intermediaries at CPEC1031 have twenty years of experience working with clients on their 1031 exchanges. They bring that experience to the table with each and every commercial transaction. Contact us today to schedule a time to chat with one of our intermediaries about your 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.

© 2020 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