1031 exchange questions when flipping a home

7 Replies

Hello,

I flipped a home under my LLC over the past 5 months. I then took proceeds/profit made from the flip and invested it into another flip home. Would this qualify for a 1031 exchange and is there anything I should do to make sure that I can classify it this way? I assume if so, all taxes/capital gains from the first flip would roll over into the next and not require me to pay taxes?

@Landon B. , flipping a house does not qualify for 1031 exchanges. Also, if you took possession of the money from the sale, it would not qualify for the 1031. There are a lot of rules surrounding the 1031 Exchange. One of the 1031 peeps will surely chime in on this thread, too.

The money you made from this flip would be counted as regular business income, and taxed at your current income rate. Make sure to save receipts for all work done on the house, so you're not paying taxes on that amount.

Flipping won't qualify for a 1031. Mind nailed it. 

Flipping = business income 

Selling a rental= capital gains that qualify for a 1031 exchange 

@Landon B. , It's both of the issues everyone has talked about.

1. If your intent in purchasing that house was primarily to resell it (pretty much the definition of flipping) then no matter what you did procedurally it will not qualify for a 1031 exchange.  And that means ordinary income tax and in your case probably self employment tax and the ACA 3.8% surcharge.  That' could easily approach 40%.

2. Even if your intent was to hold the property for productive use making it 1031 eligible there is a specific process that has to be followed in a 1031 exchange.  It starts with using a qualified intermediary who must be in place prior to the closing of the sale because it must be documented on the closing statements.  And you cannot have either actual or constructive receipt of the money.

It will require some adjustment of your model to avoid those taxes but it can be done.  Instead of fixing and flipping, do a fix rent, refinance, and then evaluate.  The refinance allows you to keep acquiring properties to value add.  The renting gives you some evidence that you may have purchased the property to hold.  And the evaluation ensures that you can provide a good rationale for why it is time to sell and 1031 a particular property.

Originally posted by @Natalie Kolodij :

Flipping won't qualify for a 1031. Mind nailed it. 

Flipping = business income 

Selling a rental= capital gains that qualify for a 1031 exchange 

Great sums up! Thanks.