1031 exchange in Austin, TX

5 Replies

Hey all. My partner and I have a single family property under contract in Austin, TX. Our plan is to rehab and flip, then roll the profits into a 1031 to use on the next property and avoid capital gains tax for now. I was told by a CPA that I cannot do a 1031 on a quick fix/flip and that I would have to hold the property for a bit and rent it to properly perform the 1031.

I had always been under the impression I could do a 1031 in this situation. Thoughts?

That's correct you can't do a 1031 in this case. It's all about the intentions on the 1031. If you're intention is to flip you can't utilize the 1031. I've typically heard you need to own a property for over a year to utilize the 1031. 

@Ross Trampler Your CPA would be correct. In order to qualify for 1031 exchange treatment there are a number of requirements that you must meet/follow. One of them is holding the property for a sufficient amount of time for rental, investment or use in a trade or business. The IRS does not state a specific timeframe that must be met and everyone has a different opinion. Some will recommend at least 12 months. In my personal opinion, 24 months is a very conservative hold time because it straddles three tax years and if audited, you can clearly show your intent to hold. Flips do not qualify for 1031 exchange treatment because your intent is to ultimately sell the property. If you were to hold the property for a couple years, then a 1031 may be a great option for you.

Originally posted by @Ross Trampler :

Hey all. My partner and I have a single family property under contract in Austin, TX. Our plan is to rehab and flip, then roll the profits into a 1031 to use on the next property and avoid capital gains tax for now. I was told by a CPA that I cannot do a 1031 on a quick fix/flip and that I would have to hold the property for a bit and rent it to properly perform the 1031.

I had always been under the impression I could do a 1031 in this situation. Thoughts?

 Depends on your intent with the investment - flips is not something you can use 1031 for. If you do end up holding on to it long enough to qualify for the 1031, my advice would be to do the rehab after your hold period, not before, if you are able. 

I am am curios, can you do a 1031 exchange and use the money to payoff or put into a rental property you already own? I don't think you can but I would like to hear from the experts on this.

Thank You, Shawn

@Ross Trampler , It's unanimous.  You cannot do a 1031 on a property you have purchased with the primary intent of resale.  But you could complete the rehab, then refi and buy your next property while holding this one long enough to establish your intent and then 1031 it while you hold your 2nd property after refinancing it and purchasing another.  

And just because I'm feeling like a party pooper anyway - @Shawn C. , the 1031 must be a sale and subsequent purchase of new replacement property.  You cannot exchange for something you already own or for improvements on a property you already own.

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