I saw this comment made by "Carla" in another thread. I've read several books on flipping property and all of them mention a 1031 exchange as a viable method for dealing with profit. Is the info I've read incorrect or am I missing something? Thanks!

whats your definition of flipping?

Buying a property, renovating it and selling it for a profit (hopefully).

to qualify for a 1031 you need to hold the property for a specified period of time. If your goal is to buy, rehab and resell then you will most likely not have held the property long enough. The longer you hold the property the more it costs you.

1031's are designed for long-term holding. If you do it right a flip will not be long-term!

[QUOTE]Originally posted by Paul Oaks:
[QB] to qualify for a 1031 you need to hold the property for a specified period of time. If your goal is to buy, rehab and resell then you will most likely not have held the property long enough. The longer you hold the property the more it costs you.

1031's are designed for long-term holding. If you do it right a flip will not be long-term!

What's the best way to deal with profits from a quick flip (under a year)? For the purpose of a 1031 exchange, what is the definition of long-term? Thanks again!

oh ok.

actually my definition of flipping is wholesaling or assigning interest in a property to another investor. this investor then rehabs for profit.

buying a property and rehabbing it for profit is 'retailing' not 'flipping' in my opinion

use a self directed Roth IRA to defer taxes with 'retailing/rehabbing'

That is only good advice if you do not want to use the profits as income. I only do 1 or 2 a year in the IRA.

Paul, how do you handle the profits not directed into the IRA? In other words, what's the most effective method for dealing with profits from a flip/rehab? And one more, what's the "technical" definition for a "flip"? Thanks for all the info!

whenever i talk to seasoned/experienced investors about rehabbing/retailing, they dont want me to use the word 'flipping' in our conversation.

whenever i talk to unseasoned/newbie investors, they use the words 'flipping' and 'rehabbing' interchangeably within the same context.

PAY YOURSELF FIRST!

put some profits into reserves

recycle the money into the next rehab project.

The reason "flipping" is not a term to use is it's associated with straw buyers,collusions and other various types of mortgage fraud.

Our broker always tells us to say we are turning over a property,or fixing up a property for resale.

She says you could innocently be say flipping and be around an attorney or someone who is with the re commission that thinks you are doing fraudulent activity,of course you aren't but it safer to use less risky words.


On rehabs what alot of investors due is fix it up then after 3 months refinance to cash out most of the new equity,since a refinance is a loan it is not considered taxable income by the irs which means for example you take 20k out on a refinance it's yours to spend as you like without taxes.Then when you sell you don't have hardly any gain on the property to be taxed or you can just 1031 the profit into another deal to avoid the gains tax.

A good website is John Adams at www.money99.com

He has been in the business for about 30 years as a broker and investor.

Yes he does have systems and stuff like that,but he has alot of free info on the site and also a free radio show he does weekly answering investor questions.He also goes over on his site the 18 reasons he believes single family detached homes are the best investment you can make,he has acquired hundreds of properties in his time and still is active today buying investment deals.I don't buy his systems but do enjoy his radio show and articles.


good luck

From my understanding through a good friend of mine which is also a quailified intermediary and accountant; in order not to be seen in the IRS eyes as a "flipper" and subject to a tax up to 50% of your profits, a suggested rule of thumb is to 1031 exchange around every 20 to 24 months. Again this is to avoid a tax of up to 50% of your profits.

Thanks for the info and patience with this topic but I'm still not clear on something. When I start rehabbing, it's something I'd like to continue doing. With that said, what's the best method in dealing with profit from a rehab? How do I go about paying as little in taxes as possible? If it's a 1031 exchange, how long must I hold the property in order to qualify?

I've just found an excellent site for 1031 info.

www.expert1031.com

Also you might want to try www.1031X.com We have used them half a dozen times. Easy to work with and they only charge $400! (I have no affiliation with them)

I would find a good accoutant to figure out the best way to handle profits. If you hold a property for less than a year you will be paying income taxes at your regular tax rate. The money you make from the flip could put you into a higher tax bracket. Even if you hold a property for a little over a year there is a chance that the IRS could determine that your "intent" was not to hold the property for investment. If that is the case you could still be taxed at your regular rate- along with what ever fines and fess they decide to add on... except that my one experience with a tax auditer looking at 1031 exchange info- they had no idea what the 1031 tax code was. A good accoutant who works a lot with real estate investors will be well worth your money.

A 1031 exchange rolls the gain from the sale of your old property into your new one. Both properties have to have been held for investment, or used in a trade or business, and you only have 180 days from the sale of your old property to get your new property purchased.

The problem is that Section 1031 says that it does not apply to "property held primarily for sale." So how does the IRS know if your intent was to hold it for investment, which would qualify for a 1031 Exchange, or hold it for sale, which would not? The IRS will look at a number of factors:
Why you originally bought the property
What you subsequently did with it
The extent of the improvements you made to it
The number and frequency of other transactions you've done;
The business you are in
The effort you went to find a buyer for your property
The listing of the property for sale with real estate brokers
What you were doing with the property at the time you sold it.
In other words, if you make your living by buying fixers, or building spec houses, and you always sell your properties within a few months of the completion of the construction or renovation, and especially if the income would be "ordinary income" to you (as opposed to short term capital gains), you have almost no hope of your 1031 Exchange passing IRS scrutiny in the event of an audit. On the other hand, if you always hold your properties for a considerable length of time, and this one time the buyer came to you and made an unsolicited offer you could not refuse, you could justify a 1031 exchange transaction.

If you purchase, rehab and then hold the property for a rental for at least the minimum time period there will be no problems.

AZLender the property you are buying as the other 1/2 of you 1031 does not have to have been an investment property previously as long as you intend to use it as an investment property. An example is a rental house I had owned for over 7yrs which I 1031 Exchanged for a older 4 bedroom home very near a major university. I rehabbed the property and currently use it as a rental for college students. It tend to hold investment properties for at least 7 yrs and do the exchange in year 8 to maximize depreciation. The earliest I would consider a 1031 is 5 years unless the deal was very sweet.

Let me clarify, I wasn't stating it had to have previously been an investment property. I was stating that any 1031 funds used for the purchase of a new property have to be used for an investment property.

As 1031 Exchanges ONLY apply to Investment properties that is pretty much a gimme for this topic.

Right, I understand the 1031 process fully, but in your following statement:

"AZLender the property you are buying as the other 1/2 of you 1031 does not have to have been an investment property previously as long as you intend to use it as an investment property"

Led me to believe you did not fully understand the content in my post.

You're both right. The tax code does state that both properties have to be held for investment (meaning the relinquished property and the replacement property- not that the replacement property had to have been held for investment prior to the sell). Yes, it's a "gimme", but it's still part of the code...