Rehabbing & 1031 Exchanging Profit

4 Replies

Hello Guys, I have a question to those who flip 25 plus homes a year. What is the best strategy out of the two I am about to put down below Strategy one: Flip homes sell them, take profit and keep flipping, paying taxes at the end of the year Strategy two: Flip homes 1031 exchange profit into the next deal until you have profit greater than your flips that you have to buy multiunits due value of past properties being a good amount of money. Has anyone done this ? What would you recommend ? This is what I see? Benefits of 1031 exchange are you avoid paying taxes and if your in real state for the long term might as well keep your money in real estate, I see real estate as being a money printing machine. Once you get into multiunits you will cashflow every month, while you are rehabbing it, and tenants are paying the loan at the same time. What do the you guys think ? Please give me cons and pros of each scenario. (only guys who have done 1031 exchange and flip more than 25 plus homes a year )

You can't 1031 exchange a flip.  You can only 1031 exchange a property that was held for investment or held for your business.  In other words, a rental property or a property that you performed your business out of.

@Frank V. , You're asking the color of a unicorn.  Combining a high velocity rehab sales business with 1031 exchanges is very difficult.   As @J Scott alluded to property that you have purchased with the primary intent of resale (flip) does not qualify for 1031 exchange.

But I do have clients in the 15 - 30 exchange per year range.  They do it by changing the flip model.  Instead of buying properties primarily to fix and flip, they buy properties to fix and hold.  Then they later look at their portfolio to determine which of the properties they have been holding are candidates to 1031.  

In order to generate cash to increase the velocity of their acquisitions they refinance where equity is available and use this for purchases.

Not everyone has the patience to be a sold out 1031 investor.  But for those who demonstrate the discipline the power of the deferred tax is a pretty compelling carrot.  I have clients on their 3rd generation of this strategy and with the passing of each generation the tax gets wiped out in the step up estate.  So tax deferred can become tax free.

Originally posted by @Dave Foster :

@Frank V., You're asking the color of a unicorn.  Combining a high velocity rehab sales business with 1031 exchanges is very difficult.   As @J Scott alluded to property that you have purchased with the primary intent of resale (flip) does not qualify for 1031 exchange.

But I do have clients in the 15 - 30 exchange per year range.  They do it by changing the flip model.  Instead of buying properties primarily to fix and flip, they buy properties to fix and hold.  Then they later look at their portfolio to determine which of the properties they have been holding are candidates to 1031.  

In order to generate cash to increase the velocity of their acquisitions they refinance where equity is available and use this for purchases.

Not everyone has the patience to be a sold out 1031 investor.  But for those who demonstrate the discipline the power of the deferred tax is a pretty compelling carrot.  I have clients on their 3rd generation of this strategy and with the passing of each generation the tax gets wiped out in the step up estate.  So tax deferred can become tax free.

Very interesting I did not know it gets wipes out after each generation. How do you determine if the property qualifies for a 1031 exchange ?

In general, if you buy a property that you intend to hold as an investment (rental) or as part of your business operations, you can 1031 exchange it.

There are lots of details around how to accomplish the 1031 exchange, but the qualifications are pretty simple.