Sell, 1031, or house hack?

Question

I am in the middle of flipping two houses. I plan on moving into one of them. One will be done about a year before the other. I’m wondering what you guys would do for taxes on them? I could live in the first one for two years(but would pay mortgage/interest obviously)  or sell right away and 1031 or pay the gains tax. Selling a freshly renovated house may be a selling point. I just am struggling with considering paying gains tax

Fulton Abraham Sanchez · Answer

@Keaton Vols, hi. Your tax outcome depends on your intent with the property:

-If it’s a flip, profits are likely taxed as ordinary income (no 1031, higher tax).

-A Section 1031 exchange only applies to investment properties, not flips or primary homes.

-Living in the property 2+ years may qualify for the Section 121 exclusion, allowing tax-free gains—but it ties up your capital.

Bottom line: your strategy must align with your original intent, proper planning before selling is key to minimizing taxes.

Jarret Jarvis · Answer

Hey Keaton! If you’re truly moving into one of them as your primary residence, the 2-out-of-5-year home sale exclusion may be the cleaner tax move, but it only applies if you actually meet the residency rules. If these were bought as flips, a 1031 usually won’t work because flipped properties are typically treated as inventory, not investment property.

Personally, I’d run the numbers both ways before deciding. In many cases, paying the tax on the first deal and preserving flexibility beats forcing a strategy that doesn’t fit the property’s intent or timeline.

Ashish Acharya · Answer

Hey Keaton, congrats on the two projects. You’ve got some solid options here, and you’ve already gotten some good feedback.

The biggest issue everyone touched on is how the IRS will view your intent with the property. If it’s considered a flip or dealer activity, the gain could be taxed as ordinary income instead of capital gains, which usually means a higher tax rate and potentially self-employment tax.

One option to consider is what Aaron mentioned above, house hacking the property you plan to live in, if that fits your situation, and possibly renting the second one. You could also look into an installment sale if you're set on selling it.

Another thing I’d consider is how these properties fit into your overall tax strategy. I don’t know if you own other rentals or what your other income sources look like, but if you have higher W-2 or business income you’re trying to offset, keeping both could create planning opportunities.

A lot of investors jump into real estate for passive income without fully understanding the difference between passive vs. non-passive income. Normally, rental losses are passive and limited. But if one spouse qualifies as a Real Estate Professional (REP) by materially participating and meeting the IRS time requirements, those losses may become non-passive and potentially offset higher W-2 or business income. This is often where a high-income earner keeps their main job while a spouse manages the portfolio full-time.

Another strategy people use is the short-term rental loophole. If a property averages 7 days or less per stay and you materially participate, losses may avoid passive limits without needing REP status. Many investors pair that with a cost seg study, accelerating depreciation upfront to create larger paper losses, save taxes now, and reinvest those savings into more deals to grow the portfolio.

Just wanted to throw those concepts out there. Definitely connect with your CPA, or one who specializes in real estate, before making a decision here. You've definitely got some options to explore! Happy to connect!

Stephen Geluz · Answer

If one of the properties works well as a real house hack or long term hold, I would lean hard at that before defaulting to a quick sale.

Dave Foster · Answer

@Keaton Vols Unfortunately, fix-and-flips dont meet the criteria and qualify for 1031 treatment because they aren't treated or taxed the same as long-term investment property. The statute states that you must have the demonstrable intent to hold the property for productive investment use. In addition to that, you'll be selling a property that is freshly completed.  That will generate ordinary income (the highest) tax.

I've worked with a bunch of builders over time.  They would build two at a time.  Move into one for two years and sell the other one to pay for the lots for the next two.  After two years they sell the one they moved into and move into one of the next two.  Sell the other and .....rinse and repeat.  Done this way, you do pay higher tax on the one sale.  But no tax on the other sale as long as you live in the property for two years.  It's a very sustainable model.

If you did decide to rent them out and later down the road decided to sell them, a 1031 would allow you to defer all of the capital gains tax and depreciation recapture and reinvest into another property of any type, whether it's single-family or commercial, in any state.

Ebonie Beaco · Answer

I have seen many real estate investors go a few different ways with this, and it really comes down to what they are trying to accomplish next.

A lot of investors choose the 1031 route when they want to keep all of their equity working and avoid paying taxes right now. That approach is usually used when the goal is to grow and move into a bigger or multiple properties, but it also means the next property has to stay an investment.

Others go the house hacking route, where they move into the property, live there for a couple of years, and then sell. That can help reduce or even eliminate taxes, while also lowering their living expenses during that time.

I have also seen investors combine both strategies by living in the property first, then later turning it into a rental, and eventually using a 1031 when they are ready to scale further.

The main thing is deciding what matters more to you right now, keeping your money moving to grow faster or reducing taxes and expenses first, then building from there.

Keaton Vols · Answer

@Bill B. They're both the same spec home. I really wouldn't mind living in both of them. But then there's the factor of paying two mortgages. I'm currently in a house hack 4 unit so when I move out I will be cash flowing on this property

Aaron Zimmerman · Answer

@Keaton Vols got it . Why not house hack one and then sell the other? Or if the other house could be used as a rental, I think that'd be a fantastic option. This is a really good problem to have. You're forcing lots of equity and you have multiple exit strategies.

personally, I'd try and keep both. One for the house hack and then the other to brrrr. If you can't brrrr, then I'd sell.

Bill B. · Answer

If the plan is already to move in to one of them, unless the first one done sucks, you move in to it. That gives you the ability to stop renting or sell your current home a year earlier. You’ll have at least one year of the 2 years to sell tax free over by the time the second one is done. As mentioned above flips face a massive tax hit including possibly self employment tax and MET investment tax if you do too well on the flip side, you’re not paying capital gains tax rate.

Figure out the taxes you’d owe total and divide by 24. That’s what you’re being paid to live there.  Ps. Move in ASAP it doesn’t have to be done to start the 2 year clock.

Sell, 1031, or house hack?

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