First Timers Seeking 1031 Exchange Input

[April Eilers]

Hi BP Community! We are currently doing our first 1031 exchange. We sold a property and our cash is being held by an intermediary (referred to as "1st Sale"). With the 1st Sale cash, we have purchased one property which we plan to hold as a rental. With the remainder of the 1st Sale cash (~100k) we are planning to purchase a property for 300k. So 100k of this purchase would be from our 1st Sale cash and 200k would be from a conventional loan. Our intent for this property is to fix and flip it within a couple months (referred to as 2nd Sale). So a few questions about how this would work and the tax implications...

1. If we buy this house for 300k, sell it for 400k, and wish to continue to avoid capital gains taxes do we then have to reinvest the full 400k (even though 200k of that was loan money)?

2. If we buy this house for 300k, sell it for 400k, and do not reinvest, what are the tax implications? A few factors to keep in mind:

i. the 1st Sale $100K cash 

ii. the fact that this house had $200K loan, and would now have $0 loan

iii. the $100k gain on the 2nd Sale

4. What is the capital gains tax rate for a short-term flip for 2nd Sale (1-2 months)? 

5. For scenario #2 above, is the short term capital gains tax rate applied to the full amount, or can the long term capital gains tax rate be applied to the 1st Sale $100k cash.

We need to figure this out before 2pm EST on 5/23. Thanks!

[Wayne Brooks]

@April Eilers The fix and flip won’t qualify for a 1031 and won’t be short term cap gains, it’ll be ordinary income.  You’ll pay that, plus whatever was deferred from the 1031, attributable to that property.

@Dave Foster will know.