Can You 1031 A Rehab
Rather than paying the earned income taxes on the sale of a rehab can a person just keep reinvesting the gains from house to house? Then once a large sum of gains has accumulated can you then live in one of the rehabs for 2 years and avoid any taxes? I know rentals qualify for the 1031 exchange but I am not sure about rehabs. I am under the impression that you have to pay the taxes at the end of the year just like you do for a job regardless of wether or not you reinvested the gains.
From what I have heard I dont think it would make a difference if it were a rehab, but I believe it would have to pass several tests - The replacement property would have to be greator or equal to the primary in Debt, Value, and Equity - which would mean you need to spend more on every property. If that is ok then it should be fine, but there is a deal breaker that I think would be an issue for a rehab - generally the government expects you to keep the replacement property for at least a year to qualify for an exchange. In the case of rehabs where you want to get in and out quickly that would not work.
Each property you exchange has to be a residence for at least 2 years for NORMAL tax breaks, but 1031 tax breaks does not matter since these usually are investment properties not lived in.
Also note you can swap properties with those not doing it for 1031 and list the buying prices so there is no gain but also maintains the low property taxes.
Quote:
On 2006-11-10 17:39, LagoonCondo wrote:
Each property you exchange has to be a residence for at least 2 years for NORMAL tax breaks, but 1031 tax breaks does not matter since these usually are investment properties not lived in.
Also note you can swap properties with those not doing it for 1031 and list the buying prices so there is no gain but also maintains the low property taxes.
This statement (above) can be misleading. If you buy a place, rehab it and sell it in say two months, you will NOT qualify for a 1031 exchange under the IRS rules.