1031 Exchange Rules??

3 Replies

Hello Bigger Pockets community,

   I began investing in real estate a couple years back and recently completed my first fix and flip. I am wondering if there is any good information about the 1031 exchange rules. I understand I have to identify some properties within 45 days and close within six months. Is there more to it than that? I guess my questions are: Is there anything else that I need to know? Anything else to consider? Any tips based on your experiences? Thank you! 

@Said Aliyev the primary issue for you will be the fact that this property was purchased as a 'fix and flip'. the 1031 exchange is only valid for long-term investments, not short-term flips. While sometimes even long-term investment props end up being sold fairly quickly after purchase, the IRS requires that you be able to demonstrate your intention to hold the property long-term when you bought it. The fact that you have referred to it as a Flip in writing doesn't aid you in proving that intent.

There's no hard and fast rule, but the general consensus is that you need to have held the prop for 12-18 months in order for the IRS to feel ok about your intention to hold the prop as a rental long-term. But, even if you have held it that long, if it is clear that you bought it with the intention of flipping it, the IRS considers that inventory, not a long-term investment, and the 1031 would not apply.

Hope that helps!

@Said Aliyev , Yep there's several criteria that all must be met in order for the exchange to be valid.  Issues of title, timing, type, third party (QI) involvement and reinvestment target (Almost a perfect "T" alliteration :)

But your current deal may be a non-starter from the beginning.  Property that qualifies for 1031 treatment is property you purchased with the intent of holding for productive use.  Property you purchase primarily to sell (fix n flip) does not qualify.  There is no statutory holding period only the issue of intent and how you document it.  But if you were thinking of this as a fix n flip all along then it wouldn't qualify.