Is a 1031 exchange worth it?

Question

If I am potentially going to make 80,000 to 100,000 profit in a fix and flip that will possibly sell for around $500,000, is it worth putting the money into a 1031 exchange?  I don't want to buy another property of that value. I would like to buy 2-3 long term rentals next.

Aaron Zimmerman · Answer

If it's a fix and flip, you likely can't 1031 exchange this property.

Jason Malabute · Answer

The most important thing to flag here is that a true fix-and-flip usually won't qualify for a 1031 exchange in the first place. The IRS treats flips as property held for resale, so that profit gets taxed as ordinary income rather than as a capital gain you can defer, and it really comes down to your intent and how the property was actually used rather than any set holding period. If you had held it as a rental for a while before selling, you'd have a much stronger case to roll it into your next rentals, and you're allowed to line up as many as three replacement properties. On a $100k gain you could be looking at roughly $25k to $30k in tax once you add in your state and any depreciation recapture, while a qualified intermediary usually runs around $950, so an exchange is well worth it when you actually qualify for one. The exact answer really depends on your specific facts, so it's worth running this by your own CPA before you sell.

Angela Revere · Answer

I'm selling a fix and flip and want to buy a couple of long term rentals. Is This not eligible?  Thank you all for the info.

Rick Albert · Answer

Fix and flip is taxed as ordinary income, you can't do a 1031 exchange. The IRS views it as an active activity.

If you fixed it up and rented it for a period of time, then you can consider it. Talk to a CPA to understand not just the tax implication, but also depreciation recapture.

Also keep in mind you can buy up to 3 properties (some exceptions can apply). So if the concern is spending $500K on one property, you have other options.

You said you would like to buy long terms rentals, so if that's the case why wouldn't you consider a 1031 exchange if you are already selling a past rental?

Dave Foster · Answer

@Angela Revere, a 1031 can be worth it for lots of investors, but is it worth it for you? Well, as @Chris Seveney said, that depends. If you have a $100k gain, you might owe close to $25k of tax, depending on your state, and that's excluding depreciation recapture, so it might be closer to $30k by the time the dust settles.

There is an added element that could cause issues with you - You're calling this a fix-and-flip.  Technically, fix-and-flips don't qualify for 1031.  But the actions you took and your intent can play a big role in whether or not it qualifies.  I'll reach out via PM in case you have questions.

Your average cost for a qualified intermediary to perform a 1031 exchange for you will be around $950, which looks pretty good next to a $25k tax bill. The trick is to find a QI that is established and experienced enough to give you good guidance and service.  And big enough to offer economies of scale.  But small enough to give you prompt personal attention. Go be Goldilocks - find the "just right one for you".

Josh C. · Answer

I was under the assumption you could not use a 1031 exchange for fix and flip. Needed to be a rental or at the bare minimum your intention was a rental.

Angela Revere · Answer

@G. Brian Davis Are you familiar with the average cost for a qualified intermediary?

G. Brian Davis · Answer

Hi @Angela Revere a 1031 exchange can be beneficial for deferring capital gains, especially with that level of profit. The key is identifying all your potential replacement properties within 45 days of selling your flip and closing on them within 180 days. I'd make sure you have a qualified intermediary in place from day one to guide you through the rules and deadlines.