Capital Gaines and Trying to Understand 1031 Exchange

Member since 2021 · 9 posts · 8 votes

Hey! We're about to close on our first rental flip. I've been doing some reading about the 1031 exchange but still have questions. Do we have to reinvest all of our profits in order to not get taxed or can we just reinvest enough for a downpayment and then use the rest of the profit towards a business vehicle, etc...? Thank you!

0 Reply

25 views

Most Popular Reply

Dan Maciejewski

Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes

There are some QIs on here that can definitely help you more, but:

Any of the boot (profit) you do not re-invest in a like-kind asset becomes taxable.

If you spend it on a business vehicle before it becomes profit, it's a business expense, AFAIK, Ask your financial planner to be sure!

4 Reply

See this reply in the discussion

4 Replies

Jump to latestLatest

Sort by

Dan Maciejewski
Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
4y
There are some QIs on here that can definitely help you more, but:
Any of the boot (profit) you do not re-invest in a like-kind asset becomes taxable.
If you spend it on a business vehicle before it becomes profit, it's a business expense, AFAIK, Ask your financial planner to be sure!
4 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
Quote from @Lain McCanless:

Hey! We're about to close on our first rental flip. I've been doing some reading about the 1031 exchange but still have questions. Do we have to reinvest all of our profits in order to not get taxed or can we just reinvest enough for a downpayment and then use the rest of the profit towards a business vehicle, etc...? Thank you!

I wouldn't refer to it as a flip if you plan to 1031 exchange. You are rehabbing, renting (for a year+) and selling. Flipping is an active business that is taxable.
As Dan said, any profits not moved to the new property are taxable. You will also transfer basis, which means any claimed depreciation moves into the new property. This happens each time you exchange, so just be aware that will become taxable in the future. A 1031 is tax deferral, not tax avoidance.
As far as the business vehicle. Talk to your CPA about the best way to claim that. The size of your business and percentage use of the vehicle for business will help determine the best route. One rental probably doesn't justify a vehicle, but if you were doing multiple flips a year, it could be justified. Of course you can do whatever you want, just be prepared to defend it to the IRS, meaning substantiating the miles were for business.
3 Reply
Alex Olson
Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
4y
@Lain McCanless what @Dan Maciejewski says in accurate. Did you rent it out at all? Did you own it for more than a year? Did you sell it unsolicited? If you answered yes to any of these you may have a case but you can not flip properties to defer the tax on the gains (profit) of your property. I would suggest renting for a year or so and then selling to give you the best chance for success. You will need a good CPA and a good 1031 Exchange QI.
1 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
4y
@Lain McCanless, If you decide that you had held this for investment use and not just to flip. then you need to do two things to defer all tax
1. Purchase at least as much as your net sale (contract price minus closing costs)
2. Use all of your net proceeds (net proceeds minus mortgage pay off) in the purchases.
You can purchase less than you sold. And you can take cash out. But if you do the IRS says you are taking profit and you pay tax on what you take out or the difference between what you sold for and what you purchased for.
The 1031 Investor5137 Reviews
Website View Page
2 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.