Flipping profits to purchase properties

[Jonathan Basden]

Could you flip a house and use the profits through a 1031 exchange to purchase a rental property?

[Robert Hetsler]

@Dave Foster is correct, as always!  If you are in the business of flipping houses, that is not what the law was meant to benefit.  However, you can do both.  For example, lets assume you are an investor in the stock market.  In this instance, you could be a daytrader of stocks in one account and qualify for the market to market election which provides certain tax benefits but at the same time you can also be an investor.  At the same time, you can have an entirely separate account that solely focuses on long term holdings and reap the benefit of a lower tax rate categorized as capital gains as opposed to ordinary income.  As such, while you can do both just be careful that it is readily discernable to the IRS in the unlikely event of an audit.  In other words, be able to easily articulate the difference in the separate but also similar type of transactions.  The important part is being able to easily distinguish the difference.  Always plan for the worst case scenario and hope for the best. 

Short answer is that if you want to take advantage of the1031 Exchange tax benefits, do not buy with the intent of fixing it up and selling it right away.  Further, certainly do not have that intent made clear to anyone and certainly not in writing especially if that is not the first and primary intent of purchasing the property.  It is possible to purchase an investment property and an unforeseeable change in circumstances leaves you no other alternative but to sell and that is something that happens but the burden would be on you to establish that change in circumstances.

Let me make it clear that I would never recommend that you do not follow the law, I am just pointing out that sometimes you are truly undecided on which way to go and if you end up engaging  in a transaction that would otherwise qualify, you do not want prior statements coming back to haunt you in the event you have to establish the intent.  I hope this helps