Flip sale 1031 exchange?

Question

Hi! I have a good understanding of the 1031 exchange but have this question. If I buy a property, rehab and sell it within a 3-6 month time frame, can i 1031 exchange that into a long term hold property? The specific numbers would be:

Buy 75k

Rehab 40k

Sale 165k

Exchange into:

165k+ purchase

Rent out and refinance

Buy 75k

Rehab 40k

Sale 165k

Exchange into:

165k+ purchase

Rent out and refinance

Dave Foster · Answer

@Mike Moran Why did you buy the property?  If you purchased with the intent of holding for productive use then you can use a 1031.  If you purchased with the primary intent of resale (fix n flip) then you cannot take advantage of the 1031.

There's no statutory holding period but of course the longer the better.  And it is the entirety of what you can use to document your intent.  Did you hold it more than a year or across two tax years?  Was your buyer an unsolicited offer? Did you actually hold and generate income?  Do you have a history of flipping or holding?  Was there a significant change in the house/area/your circumstances that warrant a change in your intent?  All of those things can be used.  Most folks feel comfortable at more than a year.  But there could always be circumstances where a shorter or longer hold period might be justified.  Sometimes accidents just happen.  When the same accident happens several times in a row it starts to look like something else.

Your intent can change.  But you must have the intent when you purchase it to hold.  The key is that it must be a demonstrable change of intent.  From what you say the optics seem to be pretty clear that this is fix n flip from the get go.  So I'd say no 1031.  If you put a renter in for a while and then evaluate that could change the narrative.

Mike Moran · Answer

Gentlemen- thank you kindly!  I’m going to hold it for a bit :).

Joe Timko · Answer

@Mike Moran

Mike my understanding is a flip is considered a on going business venture. A 1031 is designed for more long term income producing properties. If you held the flip for a year or so and then sold it you would be justified to use a 1031 exchange and defer the gain.