1031 Exchange and Vacant Land flipping

Member since 2019 · 5 posts · 1 vote

Is it possible to utilize a 1031 Exchange for vacant land? Specifically can I use a 1031 to move from parcel to parcel? Also, what is the interaction between owner financed land and a 1031 exchange? Finally, how many 1031 exchanges can I do at the same time? Thanks so much for shortening my learning curve.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Andrew Wiggins, Vacant land is eligible for 1031 exchanges as long as your intent is to hold the land for productive use (farming, grazing, building a building to hold, appreciation, waiting in the path of development etc) If your intent is primarily just to buy it to sell immediately (flipping) then you're a dealer and the land is inventory and you can't 1031 it.

Land is murky because appreciation over time is a valid intent. But appreciation absent actual productive use makes it more difficult to demonstrate intent if questioned.

The financing of a property doesn't matter at all. Whether you pay cash, have a mortgage, or the seller finances you.

There is no restriction on the number of exchanges you do. It is an issue of your intent and ability to demonstrate intent to hold for productive use.

Not wanting to put words in your mouth - but when your title says flipping, and you want to know how many you can do it really starts to sound like you're developing a model that would not be appropriate for 1031s. Although there is no statutory holding period most folks feel comfortable with property held more than a year. There could be circumstances that justify less. But one accident a year looks much more innocent than 5 or 10 accidents a year.

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Frank Chin
Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
6y
Originally posted by @Andrew Wiggins:
Is it possible to utilize a 1031 Exchange for vacant land? Specifically can I use a 1031 to move from parcel to parcel? Also, what is the interaction between owner financed land and a 1031 exchange? Finally, how many 1031 exchanges can I do at the same time? Thanks so much for shortening my learning curve.
The way a 1031 works, you have to purchase the property, collect rent on it for a period of time, preferably at least 12 months to play it safe, sell it and use the proceed to purchase another property, to get the tax free treatment. Flipping by definition does not fit the above. You have to demonstrate an intent to purchase, hold it, and then sell for capital appreciation, and with flipping, you got something below market, resell it right away for the market price, a totally different transaction, a different intent.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Andrew Wiggins, Vacant land is eligible for 1031 exchanges as long as your intent is to hold the land for productive use (farming, grazing, building a building to hold, appreciation, waiting in the path of development etc) If your intent is primarily just to buy it to sell immediately (flipping) then you're a dealer and the land is inventory and you can't 1031 it.
Land is murky because appreciation over time is a valid intent. But appreciation absent actual productive use makes it more difficult to demonstrate intent if questioned.
The financing of a property doesn't matter at all. Whether you pay cash, have a mortgage, or the seller finances you.
There is no restriction on the number of exchanges you do. It is an issue of your intent and ability to demonstrate intent to hold for productive use.
Not wanting to put words in your mouth - but when your title says flipping, and you want to know how many you can do it really starts to sound like you're developing a model that would not be appropriate for 1031s. Although there is no statutory holding period most folks feel comfortable with property held more than a year. There could be circumstances that justify less. But one accident a year looks much more innocent than 5 or 10 accidents a year.
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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Dave Foster. My son buys mountain land and usually harvests the timber. For those that he resells, he sometimes subdivides first. Does that sound like an eligible 1031 candidate?
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Paul Moore, The harvesting is certainly productive use. I don't think he'd have any issues there. Subdividing is more gray. The key is that you don't want to change the land from investment property to inventory. So substantially changing the nature of the land into a different character would be creating inventory. Think of the extreme differences between harvesting the timber and selling the land vs. platting the land, putting infrastructure in and building houses in a subdivision. The first doesn't change the nature of the land. The second most definitely does. His case is somewhere in between.
There is a general rule of thumb that entitlements that do not involve a shovel are generally not changing the land but only changing it's potential use or best and highest. Like changing density but not scraping and rebuilding. Once you break out a shovel for infrastructure or ingress/egress you're generally creating inventory and changing the nature of the land.
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