We have been investing in real estate for over 20 years but always buy and hold. We are selling on our first flip and I have another house under contract. I would like to file a 1031 Exchange to differ capital gains. My accountant is swamped with end of year hoopla and I figured I would post here first to see if it could be something I could manage on my own. Anyone with any experience with this?
You cannot 1031 a flip. For all things 1031, it pays to consult with a Qualified Intermediary. A tax pro would be helpful as well.
@Kimberly Gamez , Unfortunately not only can't you defer capital gains on the sale of the flip. It's not going to capital gains. You'll get stuck for ordinary income tax. And if you're the average citizen then you're looking at around 30%+ of your gain going to taxes (24% fed and 6% MI) !!!
A lot of my clients will turn the flipping model on it's head into a modified infamous BRRRR approach - Buy rehab, rent, refinance, and then re-evaluate to see when it's time to sell. Approached like this a couple of things happen:
1. The refi frees up cash to buy your next property now.
2. the rent and then re-evaluate component qualifies the property for 1031 treatment and let's you keep that 30% tax at work for you instead of going to the government.
If you can do a quick refi on this one. And if you have the runway to make it happen a refi now would help you out a heap with taxes. But if not this one then think about it for the next. You can't do 1031s on your own. You have to use a qualified intermediary. And they have to be involved prior to the closing of the sale of your old property.
@Dave Foster thank you for your feedback. Like i said in my post Im a newbie with this side of real estate. I appreciate you taking the time to respond!
@Bill Exeter thanks! Seems like I have a lot to learn. I appreciate your feedback on this one! :)
@Daniel Hyman thanks, I wasn’t aware of the details but appreciate your quick reply!
Wow all really good answers. I never realized you couldn’t 1031 a flip.
@Edgar Martinez , One of the quirks of 1031. There is no statutory holding period. The standard is that your intent has to be to hold the property for productive use. If audited the IRS will expect you to demonstrate that your intent was to hold and that something legitimately caused you to change your intent to then sell.
Most folks feel comfortable at anything more than a year as a suitable demonstration of intent. But there could always be circumstances where a shorter (or longer) hold period was called for.
My favorite for this year was our client who had a bear take up residence at the trash can and scare the tenant away. He had contractually agreed with the seller to keep the rentor long term. But the rentor moved out one month after purchase. How do you argue with a bear moving next door??? :)
@Dave Foster 😂 I guess it’s difficult to argue with a bear next door. I guess as long as it’s documented right? Well that’s interesting.
What about if (let’s say for example) I rehab and rent 1 house per month for 12 months. On the 13th month can I sell the 12 properties as a portfolio and 1031 into something else without worrying about an IRS audit?