I was reading through threads that are quite a few pages back and I noticed someone make this statement:
Buy and flips are not eligible for 1031 exchanges.
I’ve never heard this before.
Can someone elaborate on this for me?
You might want to read:
http://www.bayview1031.com/index.jsp?pageId=articleviewer&article=holdingperiods
Pay particular attention to the part that says:
“Relinquished Property Holding Period:
In Rev. Rul. 84-121, the Internal Revenue Service asserted its position that relinquished property acquired and exchanged soon after its acquisition will not qualify for a Section 1031 exchange, because the taxpayer is deemed to have acquired the property with the intent to dispose of it, rather than to hold it for investment or business purposes.”
A “buy and flip” is by definition a property that the intent is to “dispose of” rather than to “hold for investment”.
How long is holding period is a point of debate, though it’s considered to be at least a year to two to be safe. You normally don’t hold a flip for a year or two.
If you never heard of IRS rule “84-121”, you might want to do more research into it.
That flip property can not participate in a 1031 exchange is really only half of the tax treatment story. Here is the other half.
Property flipping is an active income business. The property you are flipping is merchandise – your business’ inventory – and is not eligible for capital gains tax treatment, nor installment sale tax treatment, and can not be depreciated during your holding period.
Because property flipping is an active income business, your profits are taxed as ordinary income at your marginal tax rate, and self-employment income taxes also apply.
but I have heard it said that if you hold your property for a year, then it is not considered ‘flipping’ and capital does apply right? And I’ve heard it is also a lower amount, like 20%…is that correct?
it’s all about the intent.
did you purchase the property, fix it up and advertise it for sale? This is a flip: ordinary business income, taxed at marginal rates plus self-employment taxes.
or did you purchase it, advertise it for rent, interview tenants, keep notes about tenant answers, run credit and background checks and then got a sweet offer to sell? this property you held for investment and its sale is capital.
holding period is irrelevant. EXCEPT capital transactions held less than 1 year are taxed at marginal income rates; held year or more taxed at 15%.
If I buy, rehab and then put in a tenant buyer with a lease option for 12 mos and at the end of the 12 mos, I sell…what kind of taxes am I looking as opposed to flipping, which is going to be roughly 40%, right?
You are still flipping. You are SELLING the property to your tenant buyer. Your property is always for sale throughout the option term. The lease option is just a technique to facilitate the sale. Does not matter how long your option period runs. When the option is exercised, your sale profits still get dealer disposition tax treatment.
For tax purposes the IRS considers the flip property as “acquired” in the same year that it is sold. Your flip property will always have a short term holding period no matter how long your actual holding period is.
Just how I see it.
But you’re saying that the IRS states if it is “acquired in the same year it is sold.”
But if I have the property for more than one year that wouldn’t apply, or would it somehow?
Your intent is to sell. That makes it inelligble for the exchange. You have no intention of using it as a rental and are trying to wiggle your way around the law. You might be able to con the IRS if the majority of your business is rental property and this is an anomaly.
Sorry BLL, I’m not really referring to 1031 at this point.
The thread might have gotten a little off topic and on to taxes.
I am asking what taxes I am looking at if I buy, rent for over a year and then sell.
that question has been answered. you just don’t like the answer.
flipped houses are considered inventory. holding period for inventory is irrelevant.
property you buy to hold and rent is an investment. then your tax treatment depends on holding period.
if you buy with the intent to sell, and simply use the lease option as a means to facilitate the sale, then you have dealt (flipped) the property.
lying about your intent is fraud.
notice that people are using words like “fraud” “con” “wiggle” “law”
if you don’t respect what we tell you, then do as you will and suffer any consequences alone.
Relax dude.
I’m asking questions…have you ever figured that a new investor could get confused with the terminology?
Take a break from your uptight tax world as give someone the benefit of the doubt that they may not have comprehended everything yet.
Sheeesh.
No, you are reading wrong. I am saying that the IRS won’t allow you to recognize the acquisition until the year that the flip property is sold. Does not matter when you actually purchase the property. Consult your CPA for specific details.