I’m getting ready to close on a fortuitous flip and will be turning around and purchasing another one, so I called today to see about getting a 1031 set up and the lady I talked to said that 1031s are only for properties that have been bought and held for a period of time. Bummed.
So in all the reading I’ve done on 1031 exchanges, how have I missed the fact that i have to hold the property for 1-2 years.
Is this true or is this title company giving me a line.
1031 is for investment property.
Flips are not “investments” by the IRS definition. They’re regular business inventory. Flips are not capital gain, and so holding period is irrelevant. 1031 does not apply.
However, to answer your question, I’m not aware of any holding period requirement for 1031 exchanges. (I could be incorrect; I have not researched it)
So the title company is correct, but not for the reason of “holding period.”
Thanks for taking the time to reply. Much appreciated.
RE: the capital gains, can you explain to me what keep this from being capital gains?
Also so am I assuming correctly that the $$ i make on the flip will just be treated as regular income?
can you explain to me what keep this from being capital gains
the property is not held for investment; it’s inventory.
You are in the business of buying and selling stuff. whether it’s houses or soap makes no difference.
am I assuming correctly that the $$ i make on the flip will just be treated as regular income
Yes. Taxed as ordinary income on Sch C, subject to both income and self employment taxes. Total tax bite = 30% to 45%.
For a property to be considered an investment property and eligible for a 1031 deferral it is generally assumed the property has to be held for a year plus a day. Or held long enough to appear on two tax returns.
The logic is there must be some sort of proof that the property was held for investment rather than just inventory that was slow to sell.