1031 exchange or show income for bank loans
Clayton SmithPro Member
Rental Property Investor · Tuscaloosa · Member since 2019 · 91 posts · 38 votes1031 exchange or show income for bank loans
Most Popular Reply
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5yOriginally posted by @Clayton Smith:
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
I purchased a property earlier this year that was in terrible shape and I believed it was a teardown so I got it for the land value. I planned to BRRRR the property. I cleaned the property and lot up and repaired the structure and it was not in as bad as shape as I originally thought. I got a cold call from a fellow investor and I threw out a high purchase price and he agreed. So I stand to make just under a $25k profit selling the property. I started my LLC last year and this will be the first time I show income and would like to finance my deals based on my LLCs income and not personal in the future.
My question is do I show the income on my taxes to help with loans or do I 1031 exchange the property and defer the taxes? Since I just bought the property I have not claimed any depreciation. This will be my 3rd flip this year so I will show around $75k in income plus my rental cashflow. Just want to get some advice on how to move forward. I have talked to my CPA and he said since the buyer contacted me unsolicited it will meet the 1031 rules on intent of the investment when purchased. Any advise would be great.
You cannot 1031 exchange a property that was never held for investment. Your CPA is giving you very risky advice that goes against legal precedence and common advice. The facts in this case do not support intent.
1. You are a flipper who has flipped three properties this year. This is your business and pattern of behavior.
2. You never placed the property in use as a rental, you never claimed deprecation and you never received rental income. It was never held for investment, not even a day!
3. The IRS has stated that two years is safe holding period for doing a like kind exchange. Some people push it down to one year, claiming two tax returns. You held this property less than one year and it was under rehab the entire time.
4. Receiving unsolicited offers has nothing to do with intent. Every investor in the world is getting unsolicited offers for properties. Every flipper is being asked "do you have other properties". Assuming your CPA is right, EVERY flipper could do 1031 on every property just claiming intent if they sold it off market. That is obviously not correct.
All of your behavior patterns show this was a flip. Regardless of what intent you try to claim, your behavior is what matters. The IRS doesn't need to prove you are lying, you need to prove that you are telling the truth.
I guess I should have included some more information about my past investments.
I have flipped 3 properties this year, my first flips, but I own 15 rentals. I am currently renovating two other rentals that I will hold for an investment property. I have also BRRRR'd properties in past years. I got a renovation loan on the property that will convert into long term financing once renovations were complete. I have not claimed depreciation because I just bought the property in April. I am not very far in the renovation but I have emails with my property manager talking about how much to charge for rent based on adding an additional bedroom. I understand the IRS guidelines on the 1031 but I believe my behavior does show that at the time of purchase I intended to hold long term. That is why my CPA gave this advise.
It doesn't change my answer, because you are not satisfying the requirements of it being "held for investment" which the IRS has said short term is not sufficient. Less than a year is short term by all standard. The IRS has stated that a time period of "two years is sufficient". You also received no investment income, so your entire financial gain from this sale is due to value add (flipping). The rules say it doesn't "apply to any real property held primarily for sale". If you had no rental income, what other purpose is there than sale? Intent doesn't matter. The word intent isn't in 26 US Code 1031.
I don't know if you will get audited, but if you do, this is very questionable at best. The burden of proof is on you and "my CPA told me it was ok" is not a defense. I am not trying to argue with you. I am genuinely trying to give you safe guidance here. It would have been better if the property was rented before being sold, because that would have show actual investment use, even if the time period was shorter.
10 Replies
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Clayton Smith:
I purchased a property earlier this year that was in terrible shape and I believed it was a teardown so I got it for the land value. I planned to BRRRR the property. I cleaned the property and lot up and repaired the structure and it was not in as bad as shape as I originally thought. I got a cold call from a fellow investor and I threw out a high purchase price and he agreed. So I stand to make just under a $25k profit selling the property. I started my LLC last year and this will be the first time I show income and would like to finance my deals based on my LLCs income and not personal in the future.
My question is do I show the income on my taxes to help with loans or do I 1031 exchange the property and defer the taxes? Since I just bought the property I have not claimed any depreciation. This will be my 3rd flip this year so I will show around $75k in income plus my rental cashflow. Just want to get some advice on how to move forward. I have talked to my CPA and he said since the buyer contacted me unsolicited it will meet the 1031 rules on intent of the investment when purchased. Any advise would be great.
You cannot 1031 exchange a property that was never held for investment. Your CPA is giving you very risky advice that goes against legal precedence and common advice. The facts in this case do not support intent.
1. You are a flipper who has flipped three properties this year. This is your business and pattern of behavior.
2. You never placed the property in use as a rental, you never claimed deprecation and you never received rental income. It was never held for investment, not even a day!
3. The IRS has stated that two years is safe holding period for doing a like kind exchange. Some people push it down to one year, claiming two tax returns. You held this property less than one year and it was under rehab the entire time.
4. Receiving unsolicited offers has nothing to do with intent. Every investor in the world is getting unsolicited offers for properties. Every flipper is being asked "do you have other properties". Assuming your CPA is right, EVERY flipper could do 1031 on every property just claiming intent if they sold it off market. That is obviously not correct.
All of your behavior patterns show this was a flip. Regardless of what intent you try to claim, your behavior is what matters. The IRS doesn't need to prove you are lying, you need to prove that you are telling the truth.
- Rental Property Investor · Tuscaloosa · Member since 2019 · 91 posts · 38 votes5y
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
I purchased a property earlier this year that was in terrible shape and I believed it was a teardown so I got it for the land value. I planned to BRRRR the property. I cleaned the property and lot up and repaired the structure and it was not in as bad as shape as I originally thought. I got a cold call from a fellow investor and I threw out a high purchase price and he agreed. So I stand to make just under a $25k profit selling the property. I started my LLC last year and this will be the first time I show income and would like to finance my deals based on my LLCs income and not personal in the future.
My question is do I show the income on my taxes to help with loans or do I 1031 exchange the property and defer the taxes? Since I just bought the property I have not claimed any depreciation. This will be my 3rd flip this year so I will show around $75k in income plus my rental cashflow. Just want to get some advice on how to move forward. I have talked to my CPA and he said since the buyer contacted me unsolicited it will meet the 1031 rules on intent of the investment when purchased. Any advise would be great.
You cannot 1031 exchange a property that was never held for investment. Your CPA is giving you very risky advice that goes against legal precedence and common advice. The facts in this case do not support intent.
1. You are a flipper who has flipped three properties this year. This is your business and pattern of behavior.
2. You never placed the property in use as a rental, you never claimed deprecation and you never received rental income. It was never held for investment, not even a day!
3. The IRS has stated that two years is safe holding period for doing a like kind exchange. Some people push it down to one year, claiming two tax returns. You held this property less than one year and it was under rehab the entire time.
4. Receiving unsolicited offers has nothing to do with intent. Every investor in the world is getting unsolicited offers for properties. Every flipper is being asked "do you have other properties". Assuming your CPA is right, EVERY flipper could do 1031 on every property just claiming intent if they sold it off market. That is obviously not correct.
All of your behavior patterns show this was a flip. Regardless of what intent you try to claim, your behavior is what matters. The IRS doesn't need to prove you are lying, you need to prove that you are telling the truth.
I guess I should have included some more information about my past investments.
I have flipped 3 properties this year, my first flips, but I own 15 rentals. I am currently renovating two other rentals that I will hold for an investment property. I have also BRRRR'd properties in past years. I got a renovation loan on the property that will convert into long term financing once renovations were complete. I have not claimed depreciation because I just bought the property in April. I am not very far in the renovation but I have emails with my property manager talking about how much to charge for rent based on adding an additional bedroom. I understand the IRS guidelines on the 1031 but I believe my behavior does show that at the time of purchase I intended to hold long term. That is why my CPA gave this advise.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Clayton Smith:
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
I purchased a property earlier this year that was in terrible shape and I believed it was a teardown so I got it for the land value. I planned to BRRRR the property. I cleaned the property and lot up and repaired the structure and it was not in as bad as shape as I originally thought. I got a cold call from a fellow investor and I threw out a high purchase price and he agreed. So I stand to make just under a $25k profit selling the property. I started my LLC last year and this will be the first time I show income and would like to finance my deals based on my LLCs income and not personal in the future.
My question is do I show the income on my taxes to help with loans or do I 1031 exchange the property and defer the taxes? Since I just bought the property I have not claimed any depreciation. This will be my 3rd flip this year so I will show around $75k in income plus my rental cashflow. Just want to get some advice on how to move forward. I have talked to my CPA and he said since the buyer contacted me unsolicited it will meet the 1031 rules on intent of the investment when purchased. Any advise would be great.
You cannot 1031 exchange a property that was never held for investment. Your CPA is giving you very risky advice that goes against legal precedence and common advice. The facts in this case do not support intent.
1. You are a flipper who has flipped three properties this year. This is your business and pattern of behavior.
2. You never placed the property in use as a rental, you never claimed deprecation and you never received rental income. It was never held for investment, not even a day!
3. The IRS has stated that two years is safe holding period for doing a like kind exchange. Some people push it down to one year, claiming two tax returns. You held this property less than one year and it was under rehab the entire time.
4. Receiving unsolicited offers has nothing to do with intent. Every investor in the world is getting unsolicited offers for properties. Every flipper is being asked "do you have other properties". Assuming your CPA is right, EVERY flipper could do 1031 on every property just claiming intent if they sold it off market. That is obviously not correct.
All of your behavior patterns show this was a flip. Regardless of what intent you try to claim, your behavior is what matters. The IRS doesn't need to prove you are lying, you need to prove that you are telling the truth.
I guess I should have included some more information about my past investments.
I have flipped 3 properties this year, my first flips, but I own 15 rentals. I am currently renovating two other rentals that I will hold for an investment property. I have also BRRRR'd properties in past years. I got a renovation loan on the property that will convert into long term financing once renovations were complete. I have not claimed depreciation because I just bought the property in April. I am not very far in the renovation but I have emails with my property manager talking about how much to charge for rent based on adding an additional bedroom. I understand the IRS guidelines on the 1031 but I believe my behavior does show that at the time of purchase I intended to hold long term. That is why my CPA gave this advise.
It doesn't change my answer, because you are not satisfying the requirements of it being "held for investment" which the IRS has said short term is not sufficient. Less than a year is short term by all standard. The IRS has stated that a time period of "two years is sufficient". You also received no investment income, so your entire financial gain from this sale is due to value add (flipping). The rules say it doesn't "apply to any real property held primarily for sale". If you had no rental income, what other purpose is there than sale? Intent doesn't matter. The word intent isn't in 26 US Code 1031.
I don't know if you will get audited, but if you do, this is very questionable at best. The burden of proof is on you and "my CPA told me it was ok" is not a defense. I am not trying to argue with you. I am genuinely trying to give you safe guidance here. It would have been better if the property was rented before being sold, because that would have show actual investment use, even if the time period was shorter.
- 5yScott WolfPro MemberLender · Boca Raton, FL · Member since 2014 · 1k+ posts · 959 votes
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
I purchased a property earlier this year that was in terrible shape and I believed it was a teardown so I got it for the land value. I planned to BRRRR the property. I cleaned the property and lot up and repaired the structure and it was not in as bad as shape as I originally thought. I got a cold call from a fellow investor and I threw out a high purchase price and he agreed. So I stand to make just under a $25k profit selling the property. I started my LLC last year and this will be the first time I show income and would like to finance my deals based on my LLCs income and not personal in the future.
My question is do I show the income on my taxes to help with loans or do I 1031 exchange the property and defer the taxes? Since I just bought the property I have not claimed any depreciation. This will be my 3rd flip this year so I will show around $75k in income plus my rental cashflow. Just want to get some advice on how to move forward. I have talked to my CPA and he said since the buyer contacted me unsolicited it will meet the 1031 rules on intent of the investment when purchased. Any advise would be great.
You cannot 1031 exchange a property that was never held for investment. Your CPA is giving you very risky advice that goes against legal precedence and common advice. The facts in this case do not support intent.
1. You are a flipper who has flipped three properties this year. This is your business and pattern of behavior.
2. You never placed the property in use as a rental, you never claimed deprecation and you never received rental income. It was never held for investment, not even a day!
3. The IRS has stated that two years is safe holding period for doing a like kind exchange. Some people push it down to one year, claiming two tax returns. You held this property less than one year and it was under rehab the entire time.
4. Receiving unsolicited offers has nothing to do with intent. Every investor in the world is getting unsolicited offers for properties. Every flipper is being asked "do you have other properties". Assuming your CPA is right, EVERY flipper could do 1031 on every property just claiming intent if they sold it off market. That is obviously not correct.
All of your behavior patterns show this was a flip. Regardless of what intent you try to claim, your behavior is what matters. The IRS doesn't need to prove you are lying, you need to prove that you are telling the truth.
I guess I should have included some more information about my past investments.
I have flipped 3 properties this year, my first flips, but I own 15 rentals. I am currently renovating two other rentals that I will hold for an investment property. I have also BRRRR'd properties in past years. I got a renovation loan on the property that will convert into long term financing once renovations were complete. I have not claimed depreciation because I just bought the property in April. I am not very far in the renovation but I have emails with my property manager talking about how much to charge for rent based on adding an additional bedroom. I understand the IRS guidelines on the 1031 but I believe my behavior does show that at the time of purchase I intended to hold long term. That is why my CPA gave this advise.
It doesn't change my answer, because you are not satisfying the requirements of it being "held for investment" which the IRS has said short term is not sufficient. Less than a year is short term by all standard. The IRS has stated that a time period of "two years is sufficient". You also received no investment income, so your entire financial gain from this sale is due to value add (flipping). The rules say it doesn't "apply to any real property held primarily for sale". If you had no rental income, what other purpose is there than sale? Intent doesn't matter. The word intent isn't in 26 US Code 1031.
I don't know if you will get audited, but if you do, this is very questionable at best. The burden of proof is on you and "my CPA told me it was ok" is not a defense. I am not trying to argue with you. I am genuinely trying to give you safe guidance here. It would have been better if the property was rented before being sold, because that would have show actual investment use, even if the time period was shorter.
I think your CPA is giving you good advice. Since BRRRRing has been part of your business model in the past, and you were called unsolicited, your initial intent was to hold the property, the IRS might allow this 1031 exchange to go through. Some attorney's I've worked with have done similar 1031 deals that have held up. I would consult more people though. My firm has a 1031 arm if you'd like to speak with the team.
- 5yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Clayton Smith, I'm with your CPA (sorry @Joe Splitrock). Intent is key. And the gold standard is an unsolicited offer. Your stated intent, past practice, and unsolicited offer all spell a 1031 to me. The fact that it was suggested by your CPA who knows how you look to the IRS better than anyone would give me comfort if I was you.
Bottom line for me is that one should never do something you know to be wrong just because you'll get away with it. But also, never not do something you know to be right just because it might be questioned.
The 1031 Investor5140 Reviews - Rental Property Investor · Tuscaloosa · Member since 2019 · 91 posts · 38 votes5y
Thank you to everyone for the feedback. I am still trying to decide what would a lender rather see for future loans. taxable income through my business or equity in another property? I have a decent amount of equity in my properties but I have only had my LLC for less than a year so I do not show much history as far as income yet.
- 5yJonathan PavkovBusiness MemberColumbus, OH · Member since 2021 · 201 posts · 166 votes
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
I purchased a property earlier this year that was in terrible shape and I believed it was a teardown so I got it for the land value. I planned to BRRRR the property. I cleaned the property and lot up and repaired the structure and it was not in as bad as shape as I originally thought. I got a cold call from a fellow investor and I threw out a high purchase price and he agreed. So I stand to make just under a $25k profit selling the property. I started my LLC last year and this will be the first time I show income and would like to finance my deals based on my LLCs income and not personal in the future.
My question is do I show the income on my taxes to help with loans or do I 1031 exchange the property and defer the taxes? Since I just bought the property I have not claimed any depreciation. This will be my 3rd flip this year so I will show around $75k in income plus my rental cashflow. Just want to get some advice on how to move forward. I have talked to my CPA and he said since the buyer contacted me unsolicited it will meet the 1031 rules on intent of the investment when purchased. Any advise would be great.
You cannot 1031 exchange a property that was never held for investment. Your CPA is giving you very risky advice that goes against legal precedence and common advice. The facts in this case do not support intent.
1. You are a flipper who has flipped three properties this year. This is your business and pattern of behavior.
2. You never placed the property in use as a rental, you never claimed deprecation and you never received rental income. It was never held for investment, not even a day!
3. The IRS has stated that two years is safe holding period for doing a like kind exchange. Some people push it down to one year, claiming two tax returns. You held this property less than one year and it was under rehab the entire time.
4. Receiving unsolicited offers has nothing to do with intent. Every investor in the world is getting unsolicited offers for properties. Every flipper is being asked "do you have other properties". Assuming your CPA is right, EVERY flipper could do 1031 on every property just claiming intent if they sold it off market. That is obviously not correct.
All of your behavior patterns show this was a flip. Regardless of what intent you try to claim, your behavior is what matters. The IRS doesn't need to prove you are lying, you need to prove that you are telling the truth.
I guess I should have included some more information about my past investments.
I have flipped 3 properties this year, my first flips, but I own 15 rentals. I am currently renovating two other rentals that I will hold for an investment property. I have also BRRRR'd properties in past years. I got a renovation loan on the property that will convert into long term financing once renovations were complete. I have not claimed depreciation because I just bought the property in April. I am not very far in the renovation but I have emails with my property manager talking about how much to charge for rent based on adding an additional bedroom. I understand the IRS guidelines on the 1031 but I believe my behavior does show that at the time of purchase I intended to hold long term. That is why my CPA gave this advise.
It doesn't change my answer, because you are not satisfying the requirements of it being "held for investment" which the IRS has said short term is not sufficient. Less than a year is short term by all standard. The IRS has stated that a time period of "two years is sufficient". You also received no investment income, so your entire financial gain from this sale is due to value add (flipping). The rules say it doesn't "apply to any real property held primarily for sale". If you had no rental income, what other purpose is there than sale? Intent doesn't matter. The word intent isn't in 26 US Code 1031.
I don't know if you will get audited, but if you do, this is very questionable at best. The burden of proof is on you and "my CPA told me it was ok" is not a defense. I am not trying to argue with you. I am genuinely trying to give you safe guidance here. It would have been better if the property was rented before being sold, because that would have show actual investment use, even if the time period was shorter.
Are you a CPA or an attorney? An offer on the property is unsolicited. I've done this exact same thing in the past and haven't been audited for it (bought with intent to hold long term, but received an offer off market that made me sell sooner than 2 years).
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Jonathan Pavkov:
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
I purchased a property earlier this year that was in terrible shape and I believed it was a teardown so I got it for the land value. I planned to BRRRR the property. I cleaned the property and lot up and repaired the structure and it was not in as bad as shape as I originally thought. I got a cold call from a fellow investor and I threw out a high purchase price and he agreed. So I stand to make just under a $25k profit selling the property. I started my LLC last year and this will be the first time I show income and would like to finance my deals based on my LLCs income and not personal in the future.
My question is do I show the income on my taxes to help with loans or do I 1031 exchange the property and defer the taxes? Since I just bought the property I have not claimed any depreciation. This will be my 3rd flip this year so I will show around $75k in income plus my rental cashflow. Just want to get some advice on how to move forward. I have talked to my CPA and he said since the buyer contacted me unsolicited it will meet the 1031 rules on intent of the investment when purchased. Any advise would be great.
You cannot 1031 exchange a property that was never held for investment. Your CPA is giving you very risky advice that goes against legal precedence and common advice. The facts in this case do not support intent.
1. You are a flipper who has flipped three properties this year. This is your business and pattern of behavior.
2. You never placed the property in use as a rental, you never claimed deprecation and you never received rental income. It was never held for investment, not even a day!
3. The IRS has stated that two years is safe holding period for doing a like kind exchange. Some people push it down to one year, claiming two tax returns. You held this property less than one year and it was under rehab the entire time.
4. Receiving unsolicited offers has nothing to do with intent. Every investor in the world is getting unsolicited offers for properties. Every flipper is being asked "do you have other properties". Assuming your CPA is right, EVERY flipper could do 1031 on every property just claiming intent if they sold it off market. That is obviously not correct.
All of your behavior patterns show this was a flip. Regardless of what intent you try to claim, your behavior is what matters. The IRS doesn't need to prove you are lying, you need to prove that you are telling the truth.
I guess I should have included some more information about my past investments.
I have flipped 3 properties this year, my first flips, but I own 15 rentals. I am currently renovating two other rentals that I will hold for an investment property. I have also BRRRR'd properties in past years. I got a renovation loan on the property that will convert into long term financing once renovations were complete. I have not claimed depreciation because I just bought the property in April. I am not very far in the renovation but I have emails with my property manager talking about how much to charge for rent based on adding an additional bedroom. I understand the IRS guidelines on the 1031 but I believe my behavior does show that at the time of purchase I intended to hold long term. That is why my CPA gave this advise.
It doesn't change my answer, because you are not satisfying the requirements of it being "held for investment" which the IRS has said short term is not sufficient. Less than a year is short term by all standard. The IRS has stated that a time period of "two years is sufficient". You also received no investment income, so your entire financial gain from this sale is due to value add (flipping). The rules say it doesn't "apply to any real property held primarily for sale". If you had no rental income, what other purpose is there than sale? Intent doesn't matter. The word intent isn't in 26 US Code 1031.
I don't know if you will get audited, but if you do, this is very questionable at best. The burden of proof is on you and "my CPA told me it was ok" is not a defense. I am not trying to argue with you. I am genuinely trying to give you safe guidance here. It would have been better if the property was rented before being sold, because that would have show actual investment use, even if the time period was shorter.
Are you a CPA or an attorney? An offer on the property is unsolicited. I've done this exact same thing in the past and haven't been audited for it (bought with intent to hold long term, but received an offer off market that made me sell sooner than 2 years).
That is like saying you have driven drunk before and didn't get caught, so that means it is legal. You can literally do whatever you want on your taxes. You can claim thousands in expenses with no receipts to substantiate. Nothing will happen unless you get audited.
Not everyone who does questionable things gets audited. Most tax professionals want to see 1 year (and one day) to hit the two year standard. Showing rental income also shows it was used in trade or business, so these two things combined are solid proof to avoid questions. The general consensus is that the less time you held the property, the harder it will be to defend.
Tax code is vague and therefore there are many tax court cases with mixed results. It is hardly clear cut that intent and unsolicited offer substantiates short holding period. Show me a court case that determined that alone is sufficient.
- 5yJonathan PavkovBusiness MemberColumbus, OH · Member since 2021 · 201 posts · 166 votes
Originally posted by @Joe Splitrock:
Originally posted by @Jonathan Pavkov:
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
Originally posted by @Joe Splitrock:
Originally posted by @Clayton Smith:
I purchased a property earlier this year that was in terrible shape and I believed it was a teardown so I got it for the land value. I planned to BRRRR the property. I cleaned the property and lot up and repaired the structure and it was not in as bad as shape as I originally thought. I got a cold call from a fellow investor and I threw out a high purchase price and he agreed. So I stand to make just under a $25k profit selling the property. I started my LLC last year and this will be the first time I show income and would like to finance my deals based on my LLCs income and not personal in the future.
My question is do I show the income on my taxes to help with loans or do I 1031 exchange the property and defer the taxes? Since I just bought the property I have not claimed any depreciation. This will be my 3rd flip this year so I will show around $75k in income plus my rental cashflow. Just want to get some advice on how to move forward. I have talked to my CPA and he said since the buyer contacted me unsolicited it will meet the 1031 rules on intent of the investment when purchased. Any advise would be great.
You cannot 1031 exchange a property that was never held for investment. Your CPA is giving you very risky advice that goes against legal precedence and common advice. The facts in this case do not support intent.
1. You are a flipper who has flipped three properties this year. This is your business and pattern of behavior.
2. You never placed the property in use as a rental, you never claimed deprecation and you never received rental income. It was never held for investment, not even a day!
3. The IRS has stated that two years is safe holding period for doing a like kind exchange. Some people push it down to one year, claiming two tax returns. You held this property less than one year and it was under rehab the entire time.
4. Receiving unsolicited offers has nothing to do with intent. Every investor in the world is getting unsolicited offers for properties. Every flipper is being asked "do you have other properties". Assuming your CPA is right, EVERY flipper could do 1031 on every property just claiming intent if they sold it off market. That is obviously not correct.
All of your behavior patterns show this was a flip. Regardless of what intent you try to claim, your behavior is what matters. The IRS doesn't need to prove you are lying, you need to prove that you are telling the truth.
I guess I should have included some more information about my past investments.
I have flipped 3 properties this year, my first flips, but I own 15 rentals. I am currently renovating two other rentals that I will hold for an investment property. I have also BRRRR'd properties in past years. I got a renovation loan on the property that will convert into long term financing once renovations were complete. I have not claimed depreciation because I just bought the property in April. I am not very far in the renovation but I have emails with my property manager talking about how much to charge for rent based on adding an additional bedroom. I understand the IRS guidelines on the 1031 but I believe my behavior does show that at the time of purchase I intended to hold long term. That is why my CPA gave this advise.
It doesn't change my answer, because you are not satisfying the requirements of it being "held for investment" which the IRS has said short term is not sufficient. Less than a year is short term by all standard. The IRS has stated that a time period of "two years is sufficient". You also received no investment income, so your entire financial gain from this sale is due to value add (flipping). The rules say it doesn't "apply to any real property held primarily for sale". If you had no rental income, what other purpose is there than sale? Intent doesn't matter. The word intent isn't in 26 US Code 1031.
I don't know if you will get audited, but if you do, this is very questionable at best. The burden of proof is on you and "my CPA told me it was ok" is not a defense. I am not trying to argue with you. I am genuinely trying to give you safe guidance here. It would have been better if the property was rented before being sold, because that would have show actual investment use, even if the time period was shorter.
Are you a CPA or an attorney? An offer on the property is unsolicited. I've done this exact same thing in the past and haven't been audited for it (bought with intent to hold long term, but received an offer off market that made me sell sooner than 2 years).
That is like saying you have driven drunk before and didn't get caught, so that means it is legal. You can literally do whatever you want on your taxes. You can claim thousands in expenses with no receipts to substantiate. Nothing will happen unless you get audited.
Not everyone who does questionable things gets audited. Most tax professionals want to see 1 year (and one day) to hit the two year standard. Showing rental income also shows it was used in trade or business, so these two things combined are solid proof to avoid questions. The general consensus is that the less time you held the property, the harder it will be to defend.
Tax code is vague and therefore there are many tax court cases with mixed results. It is hardly clear cut that intent and unsolicited offer substantiates short holding period. Show me a court case that determined that alone is sufficient.
except driving drunk IS illegal, and can kill people - so I don't recommend that. I also don't recommend people take unnecessary risks without the counsel of an attorney and a CPA.
- 5yPaul MoorePro MemberCommercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
@Clayton Smith. So your original question is a great one. I think you should call two or three bankers and ask them how they would view that income. A lot of real estate investors have very high cash flow but very low income, for taxes that is. If you have a savvy banker I think they would be able to see that income and see that you have had a lot of success this year.
My son flips land and timber and I have wholesaled some properties with low reportable income (due to depreciation etc) and a banker, especially at a small local or community bank, should take that into account if you do the 1031. Happy investing!
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