How to go about setting up a 1031 exchange

Question

If I sell my renovated bungalow inside a year of purchase, it's my understanding the 1031 exchange allows me to avoid high tax on the profit made due to the fact that the profit will be immediately invested in my next property??? Also, I have about a month of more renovation and will be flipping the property.... so when do a do a 1031...I'm supposing it's when a sell the home??? Need some advice. Thanks so much

Bill Exeter · Answer

Hi Pamela, Michael is right on the money (pun intended!).  The 1031 Exchange requires that you had/have the intent to hold the properties for rental or investment or business use.  Properties acquired to rehab and then flip are actually held for sale and not held for investment and therefore do not qualify for 1031 Exchange treatment.

Michael Plaks · Answer

@ Pamela Booker

You're welcome Pamela, and thanks for your Father's day greetings. As far as being close to OKC, nowadays distance is hardly an issue. :)

@Bill Exeter

Thank you Bill.

Pamela Booker · Answer

Thank you, Michael, for taking the time to reply to me. Wish you were closer to OKC.....could use a good accountant!!! Will take your advice of setting aside the one-third. Best Wishes to you and if your a father......here's wishing you a wonderful father's day, as well.

Michael Plaks · Answer

You will pay income tax plus self-employment tax. Together, they addup to anywhere between 15% and 40%, depending on your overall tax situation. I recommend my clients to set aside 1/3.  Keep in mind that the tax is on the net profit of your entire business, not just one deal. It's your $40k profit minus all business expenses: marketing, driving, education, etc.

Pamela Booker · Answer

Okay. I should have researched what has already been discussed in regards to 1031's. Now that I realize "flips" are not eligible, if I have a paid for property and make 40,000 profit within a year of buying the property, what are the tax liabilities.....I'm assuming much higher, but I pay taxes on the net profit, post renovation costs; correct?

thanks for any help, Pamela

Michael Plaks · Answer

Pamela, 1031 exchange is for exchange of investment properties, which generally means rental properties. It does not work for flips.

How to go about setting up a 1031 exchange

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