Can you 1031 a fix and flip?

Question

Let's say you have a property that will take just a bit over 12 months to renovate and sell... now the rule for 1031s is that you can only use them if you hold the property for at least 1 full calendar year so does this mean that I can now 1031 the property or not?

The reason why I ask if you can't is because I have heard from some people you can't no matter what because you aren't renting the property but flipping it but others say that as long as you hold it for over 1 year you can utilize the 1031 to get into another property.

Thank you to all that reply

Dave Foster · Answer

@Peyton LaBarbera, as you can see there's still quite a divergence of view points not necessarily backed up by law.  Kudos to @Earl White for discussing the actual cases.

1. There is no statutory holding period.

2. There is no statutory requirement for rental income.

3. The requirement is your intent to hold for productive use in trade, business, or for investment.

Longer is better than shorter

Rent is better than no rent

Efforts to hold are better than no efforts to hold.

Circumstances must change your intent.  And you should be able to demonstrate those circumstances.  @Alex Olson give you the best example of one of those circumstances - the unsolicited buyer.

Earl White · Answer

One year is the difference point from short term to long term capital gains. This is a good benchmark - but there is no law that says this expressly. If you got audited and had never made any efforts to rent it and just ran late or too long to sell, perhaps you would run into problems.

I wrote about this is my blog - but here is the key part below. https://www.earlwhite.law/guide-1031-exchange-new-jersey/

“Dealer Property” Not Allowed

Property held for resale (often called “dealer property”) cannot be included in a 1031 exchange. See Section 1031(f) (“This subsection shall not apply to any exchange of real property held primarily for sale.”) Investors building or flipping a house to an end buyer are holding the property for sale and thus cannot utilize a 1031 exchange on those transactions.

To establish whether a taxpayer has held property for sale, courts evaluate the taxpayer’s intent at the time he disposes of the property. Brauer v. Commissioner, 74 T.C. 1134 (1980) (“The taxpayer’s intent at the time of the exchange is controlling and must be determined.”)

Courts consider the following factors in assessing if the property was held for sale: (1) the nature and purpose of the acquisition of the property and the duration of the ownership; (2) the extent and nature of the taxpayer’s efforts to sell the property; (3) the number, extent, continuity and substantiality of the sales; (4) the extent of subdividing, developing, and advertising to increase sales; (5) the use of a business office for the sale of the property; (6) the character and degree of supervision or control exercised by the taxpayer over any representative selling the property; and (7) the time and effort the taxpayer habitually devoted to the sales. Cottle v. Commissioner, 89 T.C. 467, 487 (1987).

Although no single factor is determinative, the combination of several factors supporting a particular result is sufficient for a court to decide whether a taxpayer held property for sale to customers in the ordinary course of a trade or business. Raymond v. Commissioner, No. 18162-99 (T.C. Apr. 17, 2001).

See Reesink v. Commissioner, No. 2475-10 (T.C. Apr. 23, 2012) (The Tax Court approved 1031 exchange even though the taxpayer moved in eight months after the exchange. The court determined the requisite intent was proven by the taxpayers’ efforts to rent the home, including placing flyers in nearby areas and showing the property to potential renters, demonstrated their intent to hold the property for business purposes.)

See Goolsby v. Commissioner, No. 1276-07(T.C. Apr. 1, 2010) (The Tax Court rejected a 1031 exchange because the taxpayer failed to demonstrate investment intent citing, among other factors, the taxpayers’ failure to research whether certain covenants permitted the use of the real estate as rental property and their minimal efforts to actually rent the property).

Alex Olson · Answer

Like @Earl White says the intent needs to be that you were using it as an investment. I have seen people that have held for 6 months as a rental and then someone came along and offered to buy it off market and it still passed the sniff test for a 1031 exchange.

Jack Seiden · Answer

You’d need to rent for at least a year, the length is irrelevant it’s about intent, if you sell without renting it’s a flip regardless of timeline.

Wade Wisner · Answer

I have done this same thing with a fix-n-flip house in Baltimore.  It was never rented and I exchanged it for a multi-tenant office property in Knoxville, Tn.  Worked great.

Peyton LaBarbera · Answer

Ok glad I cleared that up thank you guys for answering so quickly, I appreciate it.

Can you 1031 a fix and flip?

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