1031 into an existing property?

[Todd Kendrick]

Newbie Starting out here:

Our plan is to buy investment property/ rental, then the next property (5-8 months) would be a flip. How is the flip profit taxed? I thought a 1031 is needed and then if possible to but that profit back into the first rental just to pay down the mortgage.

How does this work?

[Bill Brandt]

You can’t 1031 a flip, it’s only for investment properties.

Flips are taxed at the highest possible rate.

You can’t use  1031 proceeds towards anything you already own or to pay down any debt. It has to be used towards purchasing new real estate. 

[Dave Foster]

@Todd Kendrick, Yes and yes to what @Bill Brandt said.  But if you simply keep your mortgage on the existing property manageable and hold that flip property over a year you can then sell and 1031 it into a new property altogether.

Then take all extra cashflow and pay down the mortgage with the highest interest.  Don't let your desire to create equity cause you to lose benefits like the tax deferral and letting tenants pay down your loans.  Just make sure you're not over-leveraged when you buy.

[Todd Kendrick]

So if flips are taxed that high, how or why is everyone flipping so much, on here or tv?

[Dave Foster]

@Todd Kendrick,

Sometimes it's a lack of cash and the need to keep the pipes primed more quickly but no cash to do so.

Sometimes it's because it is a job for them.  and they need the liquidity to live on as well.

Sometimes it's just because we've also got a little adrenaline freak flag that needs to fly and be satisfied once in a while with a good feeling fix and flip!

And sometimes it's just because nobody explained to them what the difference could be delaying and taking advantage of 1031 exchanges..