Real Estate Investment Vs. Inventory

[Sam Cummings]

Hello Fellow Well Endowed Pocket Havers,

Background: Recently purchased a single family home in Philadelphia as an investment hold property in cash. Decided after buying the house it would be worth selling due to comps in the area. I'm now in contract to sell the property. I had the intention of using a 1031 exchange after selling this house.

Numbers: 

Purchase Price - $40,500

Renovation Cost - $40,000

Sale Amount - $116,500

Time Frame - Under 6 months

After days of research and countless contradicting conclusions, it has come to my attention that because this is a short term sale, the property may be viewed as Inventory as opposed to an Investment, which would then render it ineligible for a 1031. The IRS profiles some Real Estate Developers such as myself to be "Dealers" (ones who "flip houses," which in no way, shape or form am I admitting to be).

OTHER KEY INFORMATION: This was my first property ever purchased, I have since bought a second with the intention to sell it.

Please god, if any of you, have any insight on this matter specifically for Philadelphia or Pennsylvania. Bestow your knowledge upon me. Or if you think you can be of help in anyway, that is also truly appreciated.

Best Regards,

Non Dealer

[Steve Babiak]

One additional consideration is that with a 1031 exchange the PA Dept of Revenue does not defer capital gains taxes due to PA - that must be paid in tax year of the sale. Your replacement property then has some separate bookkeeping with respect to PA basis and federal basis, and the corresponding depreciation. 

 Those are matters to discuss with your accountant to see if the exchange is worth doing, given the PA capital gains, the transfer taxes and the cost paid to the QI performing the exchange.