Does a property flip qualify for a 1031 exchange?

When it comes to meeting the requirements of section #1031 of the U.S. Tax Code, one key element that the IRS will scrutinize is the taxpayer’s intent. This is especially true when it comes to determining whether property has been held for investment purposes.

With the popularity of house flipping still high, many real estate investors naturally inquire about whether their flipped properties might qualify for an exchange. However, the IRS is fairly clear that flipped properties do not qualify as investment properties, thus falling outside the safe harbor of section 1031.

However, this does not necessarily mean that a property you originally bought to fix up can never qualify for a 1031 exchange. To determine whether your property might qualify in the eyes of the IRS, you should answer four questions:

• How long did you own the property before you made improvements?
• What was your original intention when you acquired the property?
• Has anyone lived in the property since you acquired it?
• What do you plan to do with the replacement property?

How you answer these questions will determine whether it is likely your exchange will be honored by the tax man. If your answers suggest you purchased the property to fix up and re-sell, then no exchange is possible. However, if you can show intent to hold it as an investment, then a 1031 exchange becomes possible.

If you find yourself in this grey area of exchanges, it is prudent to speak with your tax attorney or accountant to determine appropriate next steps.

If you’re considering a 1031 exchange, please visit our website to learn more about the exchange process, our qualified intermediary services and how we can help you find and close on your next 1031 exchange property.