Rental Property Rehabbed to Sell -- 1031 Exchange Implications
Hi BP Community. What are the implications for a 1031 Exchange if a long-term rental property is rehabbed prior to sale? For example, the homeowner improves the interior of the house (vacant with no tenants) in order to get a better offer and return on investment.
Is it a sliding scale (e.g., a certain amount of work will convert the rental into a flip)? If there is a sliding scale, where is that delineating line between rental (with 1031 benefits) and flip (loss of 1031 benefits)?
Any and all answers or thoughts are appreciated. Thanks in advance.
Not speaking as a 1031 Facilitator, but I believe any work put in would be Capital Improvements and simply increase your basis in the property, as long as it was a rental for at least 2 of the past 5 years.
@Curtis Bidwell Thanks Curtis.
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#2 1031 Exchanges Contributor
- 1031 Exchange Qualified Intermediary
- San Diego, CA
Originally posted by @Curtis Bidwell:
Not speaking as a 1031 Facilitator, but I believe any work put in would be Capital Improvements and simply increase your basis in the property, as long as it was a rental for at least 2 of the past 5 years.
Hi Curtis,
I thought I would jump in here and clarify. The key is that you must have the intent to hold for investment/rental. So, if they held for rental for a number of years and then decided to sell and merely renovated the property to get it ready for sale, there will not be a problem. It is only a problem with they originally acquire the property with the intent to buy, fix and flip.
There is no two out of five year holding requirement for 1031 Exchanges. This is the requirement for the 121 Exclusion for the sale of your primary residence (not rental or investment property).
