Rolling over profits in one property to avoid tax

8 Replies

I'm under contract on an existing single family in Billings, Montana. I already own an existing multiplex here in Billings (and apparently that property is like finding unicorn farts). My question is, if I wanted to flip the property I'm under contract on to pay down the mtg on my quad, would I be able to avoid taxation on those profits from the flip? Can you roll profits from one property sale into an already-existing property within a year and thus avoid cap gains? We may try and BRRR the property alternatively too...any thoughts?

@Account Closed You can roll profits from property into another while deferring taxes.  It's called a 1031 exchange.  However, I think given the facts you have provided you will not be eligible for this treatment.   So in general how I have seen 1031 exchanges work is that you identify what property you want to acquire, sell the old property, take the proceeds from that sale and buy the new property.  Subject to certain rules and restrictions you can defer the taxes on the sale of the first property.  Generally property you flip cannot be used in a 1031 exchange because it is considered "Inventory", and inventory is one of the specifically forbidden pieces of property you can do a 1031 exchange with.  Also   you cannot roll the funds from the sale into a piece of already owned property and obtain the 1031 treatment.  This area of taxation is tricky, I suggest you speak with a tax specialist.  I am writing this post from memory so don't take what I have written as gospel.  Check it.  

@Account Closed ,

There's two problems with your scenario.  First, a 1031 always involves a sale followed by a purchase.  You cannot exchange into a property you already own.  Second, property that qualifies for 1031 treatment is property that you have purchased with the intent to hold for productive use.  Your intent can always change but that generally precludes "flipping" property and using 1031s generally.  Sorry but you'll have to pay some tax if you want to apply the sale to the wind of the unicorn.

So what if you spend that profit toward improvements you can offset costs on with the quad? Wouldn't it then be a deductible expense, and thus offsetting any taxes incurred? Maybe not a 1:1 offset, but if it's a capital expense, I should be able deduct a good portion. Plus any cash I put into the BRRR process is a deduction as well.

https://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Rental-Property-Deductions-You-Can-Take-at-Tax-Time/INF26315.html

https://www.irs.gov/businesses/small-businesses-self-employed/a-brief-overview-of-depreciation

@Account Closed I think if your expenses on the quad exceed the cash flow then you would be able to use the remainder deduction toward the SF flip profits.

@Account Closed No- Improvements on your 4 plex are most likely going to need to be capitalized and added to the basis of the quad and depreciated. Only smaller repairs get to be expensed. 

So if you flip a house and spend 30k in a renovation on the quad- it's just going to bump your basis on the quad and 1/27.5th of those expenses would be deductible in that first year. 

If you have the cash to flip the house....why not use that to improve the 4 plex, take out the equity from the improvement- and utilize a BRRR strategy there.

I'm not sure what you're referring to regarding cash put into that process being a deduction. 

In ALL CASES,  you must be on title - - not just a contract transaction.

Other issue for 1031s: the normal 1031 is

  • sell one
  • 1031 into it's replacement

A reverse 1031, initiated BEFORE anything else occurs allows

  • purchase of the replacement
  • and then the subsequent sale of the existing

@Account Closed has already said that in a 1031 exchange, you can only use the proceeds from the sale of your relinquished property to "acquire" a replacement property.  Using the 1031 funds to make improvements to a property you already own is not acquiring a replacement property.  This use of the 1031 funds would invalidate the 1031 exchange and make the relinquished property sale a fully taxable event.

Thanks Dave. This makes sense. 

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