when can i use 1031 exchange -need advice

22 Replies

hi - purchased my property in January 28th and just sold it and signed the contract on 10/21.  Just spoke to a 1031 exchange lawyer and he said that this is not a good scenario and I cant do a 1031 exchange, that i did not hold the property for long enough time and i would surely be audited by the irs if i did this.  Does anyone have any advice? how do you guys do it? the profit is around $100k so the tax hit would be huge. I am planing on purchasing another property right away.  Not sure what to do here. Any advice would be appreciated.  


1. You must set up to do the 1031 exchange before the property sells, you can't do it after. 

2. It can not be your primary residence 

3. It does need to show intent to hold the property as an investment- this may look more like a flip and get it flagged. 

I'm not an expert on these though. @Bill Exeter  

hi @Natalie Kolodij - thank you for your response.  So i have not closed yet and i'm around 30 days away from closing.  The property i sold it was not a primary residence i just bought it to flip.  Are we not allowed to do a 1031 with flips?  I held the property for 9 months does that not count as holding as an investment?    thank you again on your imput

Correct- not allowed to use the 1031 for flips generally. 

Hopefully one of the experts chimes in here...I know there are some exceptions but it's only for investment property. i.e holding to appreciate in value. A flip is considered inventory and treated as a normal sale. 

I second Natalie (can't tag)

you can't do it on flips.

as for what to do with gain. I don't know.

we haven't crossed that bridge.
we 1031 exchange our primary home after it was a rental for 10 yrs. we lived for 5 yrs.

other units we live in flip. we took the exemption.

part of the reason I switched to buy/hold was the tax... and my flip was didn't make that much. it wasn't worth the trouble

ahh I would love that interest free loan from the government (taxes that i have to pay) to invest in the new property.  @jeniiferLee i'm just getting started into flipping and this flip enables me to do 2 or 3 a year now as i'm trying to do this full time

where are my seasoned flippers? what do you guys do? should i start an LLC and put the house under the company? will that help me somehow?

You should talk to your CPA. Are you sure you're calculating the gain correctly? They may be able to utilize a DPAD deduction for your flip. 

@Bo Qosja , In a maturing market the time between flips increases.  This plays into a change of strategy like @Jennifer Lee has adopted.  Instead of buying properties with the primary intent of resale, you buy properties with the intent of holding for productive use.  Put them into service as rentals for a bit and then re-evaluate their position in your portfolio.  Now if you sell a property you can 1031 and avail yourself of the interest free loan of the taxes to build your own portfolio.

There is no statutory holding period.  And as far as we know, 1031s are not an audit trigger.  However if you are audited and have done a 1031 it will be examined.  Most conservative folks feel comfortable after a year.  But there's always reasons that justify a shorter or longer period.  The key again is your intent.  But longer is better than shorter.

Based on past experience, I don't know that 1031's are not an audit trigger. Good luck.

@Natalie Kolodij thanks again, yes the gain is calculated accurately and I will definitely talk to my cpa (when i get one lol)

@Dave Foster - thank you for your advice. This was a foreclosure that i bought and couldn't get the previous tenants out until june. So are you saying that I should be able to do a 1031 and since it hasn't been over a year doesn't matter? Thanks in advance

@Bo Qosja , nope not saying that exactly.  I'm saying that it is not the time period that is the final judge on whether or not you can 1031.  It is your intent.  If your intent was to buy it evict the tenants fix it and sell it then you cannot do a 1031 even if you have owned it more than a year because your intent when you bought it was primarily to resell it.  Your actions will demonstrate your intent - letters to CPA/realtor, what you did with the rentors immediately.  Did you put if up for rent after evicting and fixing, etc etc.

If your intent was to buy the house in foreclosure and you intended to hold it but something happened like the tenants you thought you had turned bad.  Or you couldn't rent it for the right amount, or .... then you may have a case.  Again,  your actions will demonstrate your intent.

In general longer is better but, the same hold period with different intent will show different actions and it is these types things that will be looked at by the field agent if you are ever audited.  

Adding to this thread...What is the best case "reasoning" to 1031 a residential land sale to an apartment building?

@Robert James

As long as the relinquished property is real estate held for investment use and the replacement property is real estate that will be held for investment use, you are good to go.  Not sure what you mean by "best case reasoning", but the tax code lays it out for you pretty clearly.

@Robert James , @Dave Toelkes laid out the legal thoughts very clearly.  Any type of real estate held for productive use in business trade or for investment may be exchanged for any other type real estate also held the same way.

If your question is "why would I do that" I spose there could be a myriad of answers including - 

Moving from no cash flow to cash flow.  Moving to depreciable basis.  Getting rid of a large piece of developable land before it is improved to the point where it becomes inventory and is ineligible for 1031.  Moving from rural to urban.  Geography, appreciation, ability to live in part.  The snail darter, or endangered field mouse you saw on  your last walk in your woods!!!  The list goes on. And of course the reverse could be reasoned as well.

If you're contemplating such a move the real question is, "why do you want to ...."

Just an added note a 1031 exchange can be used on Real or Personal property.  But still must be like kind.  

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@Scott Vance  wow never knew that Thanks  I learn something every day on BP


Overview of Personal Property 1031 Exchanges

Personal property 1031 Exchanges often include, but are certainly not limited to, exchanges of:

  • corporate aircraft
  • commercial aircraft
  • aircraft engines
  • aviation related equipment
  • shipping vessels
  • railroad rolling stock
  • automobile fleets
  • trucks
  • trucking equipment
  • livestock
  • gold coins
  • paintings
  • art work

Intangible personal property 1031 Exchanges can involve assets such as:

to ADD, the only 2 issue we hit on with our 1031:

we replaced a condo apt (MA) with a commercial 6 unit office bldg (PA)

1. the OWNERSHIP has to be the SAME STRUCTURE!

We held the condo a joint tenant as husband and wife in a trust. 50-50%, We COULDN"T own the commercial with 1 single LLC.

We didn't want to hold the commercial in our personal name. so we talked to lawyers and the QI. we ended up using my LLC and my husband has to create his own LLC. (He didn't have one that is 100% his, only 50-50 with me). BOTH LLC are the buyers with 50-50 interest

Our single LLC with both of us didn't work.

2. MA recognized the 1031 and we didn't pay any capital gain in MA.  but PA STATE didn't recognize 1031. so we had to pay STATE level Capital gain in PA.... that was a oversight I misunderstood. but it worked out!

@Dave Foster @Dave Toelkes I appreciate both of your insight! The land I was referring to is two empty lots in a residential neighborhood that we purchased, and want to sell to move the profit into a larger apartment building. We purchased about 2 months ago...

I just wanted to ensure that the vacant lots would be treated as "investments" since we have not rented the out etc before. I assume as you guys both mentioned we are safe, but the 1031 website mentioned:

"property held "primarily for sale" is also excluded. This excluded property would include business inventory. For real estate, it means property purchased with the intent to sell it, such as fixer upper or vacant land to be developed into a house. An investor who "turns" residential properties, or a private developer, may be classified as a dealer"

I really appreciate your insight!

@Robert James , new info and yep you've got a potential issue.  But as you correctly identify it's not the type of property - that's fine.  It's what your intent was in buying those lots.  If you bought them primarily for resale then they are inventory and cannot be afforded 1031 treatment.  If you bought them with the intent of holding - either to build a long term hold structure possibly or to hold for path of progress or to see where the neighborhood was going, then you still may be able to do a 1031.  The key is in how you can demonstrate that intent through actual use, corespondence with your professsional team, past and present practice, etc.

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