{"id":108428,"date":"2019-03-12T14:30:23","date_gmt":"2019-03-12T20:30:23","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=108428"},"modified":"2024-02-19T14:05:39","modified_gmt":"2024-02-19T21:05:39","slug":"unsolicited-offers-1031-exchanges","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/unsolicited-offers-1031-exchanges","title":{"rendered":"Unsolicited Offer You Can\u2019t Refuse? How to Avoid a Big Tax Hit When Selling Unexpectedly"},"content":{"rendered":"

It\u2019s an investor\u2019s dream scenario. You purchase a distressed property and start on the mountain of repairs and renovations. Then, someone else sees and wants\u2014no, needs\u2014your property.<\/p>\n

Enamored by your real estate, they propose to pay you more than you paid. Before the sweat equity even begins to form on your brow, you receive an unsolicited offer at a handsome profit.<\/p>\n

Profit without pain\u2014what could be better? Well, profit without pain and no tax hit<\/strong> while unexpectedly moving on to the next investment property would be best case scenario.<\/p>\n

Getting an Unsolicited Offer<\/h2>\n

This is exactly what happened to BiggerPockets member Jay. He is a rehab hold investor on a fast track to quitting his day job.<\/p>\n

He purchased a rental property and was in the very initial stages of its rehab. Then, less than a month after closing, another investor spotted his smart play and offered him a handsome profit.<\/p>\n

Despite his habit of buying and holding, at the time he received the offer, Jay had learned of a six-plex that would be the perfect addition to his portfolio. But he did not have the capital to hold and renovate the initial property and get the six-plex, as well.<\/p>\n

Then came the unsolicited offer. Jay accepted the offer and began to work the numbers for the six-plex. He was very close, but the tax bill on the gain from the unexpected sale put the replacement purchase just out of reach.<\/p>\n

If he could keep his taxes working for his own benefit using a 1031 exchange<\/a>, it would be a game changer\u2014but he didn\u2019t think he had satisfied the hold period.<\/p>\n

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Holding Period for a 1031 Exchange<\/h2>\n

The hold period is only one of the ways that the IRS differentiates between dealers (intent to sell) and investors (intent to hold). Investors qualify for 1031 exchanges and dealers do not. A longer period of ownership can be one indicator of an investor\u2019s intent to hold.<\/p>\n

It was three days before he was to close on the sale from the unsolicited offer. Jay threw out a Hail Mary appeal post on the BP forum.<\/p>\n

Based on his question and our follow-up conversation, I was able to show him how he could use all his profit\u2014even the taxes\u2014toward the purchase of his replacement six-plex.<\/p>\n

Even though he had held the property only a short time, he and his accountant determined that he was eligible to defer all tax. This is because the IRS can take many factors into consideration when determining the intent of the investor in a 1031 exchange.<\/p>\n

Typically, an investment property is considered to be held for trade, business, or investment and eligible for 1031 tax deferral when you have owned it for 12 months or more. Longer is better than shorter.<\/p>\n

Related:\u00a0<\/strong><\/em>The Ultimate Guide to Real Estate Taxes & Deductions<\/a><\/em><\/p>\n

Showing Intent is Key<\/h2>\n

The keyword that the entire 1031 exchange statute hinges on is \u201cintent.\u201d<\/p>\n

Think about the farmer who goes to an auction and buys a piece of land. Three months later, he sells it for 10 times what he paid.<\/p>\n

Is he a dealer or investor? His intent can be determined by looking at his history, his actions, and his communication.<\/p>\n