Are Rehabs Eligible for 1031 Exchange?
If an LLC, whose members have day jobs, rehab houses, can they use 1031 exchanges? Thanks.
If an LLC, whose members have day jobs, rehab houses, can they use 1031 exchanges? Thanks.
If the focus of your business is flipping your rehabs for quick profit, then, NO a 1031 exchange is not available to you.
Depends on how many rehab/flip deals you do a year and how long you hold each of them.
If you only do 1 deal a year, then you probably are not a "dealer" and can probably argue the real estate was held for investment purposes.
More than 1 deal a year ... that depends. This requires some research in the case law, because it is a facts and circumstances test, meaning there are no bright line rules.
The fact that you have day jobs and earn a substantial amount of your income from non-rehabbing sources helps. But it will also depend on what your day jobs are. If you are a developer, construction worker, or real estate agent, that can be problematic because your activities of your day job may be attributable to your "rehabbing" investments so that the IRS might argue you are a dealer in real estate.
Simply put, if the real estate is inventory or property held for sale to customers in the ordinary course of business, the gain on the real estate cannot be deferred using Section 1031 exchange.
Taxjunkie
I am a bit more conservative than taxjunkie. I maintain that even one rehab/flip deal is a "dealer disposition" because a flip is started with the intent to resell for profit.
Thus, by default, the property is stock in trade and does not meet the "investment use" criteria that would qualify it to participate in a 1031 like-kind exchange.
I agree with taxjunkie that doing only one flip/1031 deal might not catch the attention of the IRS. However, when the IRS does decide to look at your tax return (random audits do happen) the facts and circumstances of your flip deal may not pass muster for an investment use property. Your 1031 exchange could be recharacterized as a taxable sale, back taxes assessed with penalties and interest added for good measure.
I am not willing to play "tax audit roulette".[ Edited by DaveT on Date 03/18/2003 ]
Quote: I am a bit more conservative than taxjunkie. I maintain that even one rehab/flip deal is a "dealer disposition" because a flip is started with the intent to resell for profit.
I agree completely. The IRS, unfortunately, can do anything they like so if they deem the property "dealer property" and you intended to sell it fast after rehab you'll get burned. But I agree it might be worth a shot if you've only done one.
jom[ Edited by gbtjom on Date 04/03/2003 ]
Quote:Hopefully, the IRS won't notice... gbtjom(jom),
If you are hoping the IRS won't notice, why are you announcing what you did in a public forum?
Actually, it wouldn't be so bad if the IRS did notice because the tax treatment, the tax rate applied to the sale profits, and the bottom line are identical for both a "dealer disposition" and a short term capital gain.
One difference in the tax treatment of the dealer disposition and the sale of an investment property crops up when the dealer realty is sold with seller financing on an installment sale (such as a contract for deed). In this case, the seller's profit is received in a series of future installments but the IRS wants all of its tax due on the total profit up front and in one lump sum. The seller might not have received enough cash to pay the tax bill.