Qualified Intermediary 1031

5 Replies

Good Morning.  Seeking some advice and feedack from those who have had to use a qualified intermediary to handle their 1031's.  

-say you have 5 deals on the year whatever that be wholesaling or flipping, do they charge you per deal or does the paperwork they are responsible for fall under a blanket price?

-is there a personal deadline you want to have the 1031's for that fiscal year complete and if so do you need that paperwork to file your taxes or is the 1031 process a complete separate thing? 

Thanks all.  Any additional feedback besides the two questions I asked is welcome as I am sure there are plenty of important things I am not even aware of.

Happy Sunday,

Mike

If you're wholesaling or fix and flipping you cannot use 1031 exchanges. 1031 exchanges can only be used for investment properties.  Wholesaling and fix and flipping are both considered active business, not investing.  With wholesaling or fix and flipping any income is ordinary income and subject to state and local taxes at your marginal rate as well as self employment tax (i.e., both halves of social security and medicare.)

@Michael Weis , Sorry to say that @Jon Holdman is absolutely correct. Short-term investments like flips and wholesales do not qualify for 1031 treatment. The 1031 is built for long-term investments, to help investors keep their capital invested, even if they want to change the specific asset. The types of properties you are talking about would be considered 'inventory' since you typically sell them within one year. That income is, therefore, ordinary business income. 

@Jon Holdman @Clayton Mobley so that being said would the tax I pay on a flip or wholesale only be paid on what I clear at the end of a deal? for instance pay $40k for property and rehab for $35k. sell property for $105k minus agent and various fees. is my income for that deal considered $30k or the entire $105k? (sorry I think I made that way more complicated than I had to). also for long term rentals are you taxed only on what you pocket after paying mortgage, management, and other various fees? Will it be necessary to itemize every property come tax time?

You only pay taxes on your profit for both rentals and fix and flips.  You report rental income on Schedule E.  That form breaks out each line item for the property.  You have to do one of these for each property.  You also have to break out a lot of detail for fix and flips.  I highly recommend using an accountant and not trying to DIY taxes.

A couple of thing about rentals and taxes.  For one, you do not deduct the full mortgage payment.  Only the interest.  The principal portion of the payment may feel like an expense.  But in reality its a transfer from one of your accounts (your bank account) to a different account (equity in the property) and so is not an expense.  Second, as you take depreciation (or are allowed to take it if you don't, IDK why you would do that) the "basis" in the property decreases.  When you sell, that increases your gain.  Further, the amount of depreciation taken or allowed (whichever is greater) when you sell is subject to the "tax on unrecaptured depreciation" rather than capital gains.  Currently that tax rate is your ordinary tax rate, though capped at 25%.

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