Buy, Rent, Fix THEN Flip?

Question

I have a grand plan in mind for a possibly 1031 exchange in the next year or two and wanted to bounce it off you experts.

1. Bought a buy/hold property in February for $30,000. The property is currently leased at $750/month for 12 months.

2. After the lease is up next April, I would like to put significant money into the property followed by a sale of the property as it is in a redevelopment area where the is happening frequently. I think I can sell it for $100,000 after $30,000 worth of rehab.

Would I qualify for a 1031 exchange for the $40,000(ish) in profit I would be reaping from this deal? Obviously my intent with this property is to hold  in my portfolio for the foreseeable future, but if I can squeeze out $40,000 tax free from selling the property one year later I will consider it.

Thanks in advance

Dave Foster · Answer

@Evan Manship

Save a copy of your post above. That's part of demonstrating your intent.  So is the lease and rental income and the length of time etc etc.  If you ask any old time investor they'll tell you that everything they have is for sale - at the right price.  But that does not mean that they bought just to sell.  So little things like notes to your cpa and this blog provide the differentiation.

Bill Exeter · Answer

Hi Evan,

It all boils down to your intent.  If you get audited, you would have to be able to demonstrate that you had the intent to buy and hold for investment and not buy, rehab and sell/flip.  You would need to make sure that everything you do and everything that you document demonstrates a buy and hold intention.  There are cases on the books where the IRS (and the courts) have agreed that an investors intent did in fact change from buy and hold for investment to buy and hold for sale, so you have to be very careful in your documentation.