is this considered a 1031 exchange

[Julian Dozortcev]

Hello All,

If you purchase a home for a rehab sell it and then use those funds to purchase another rehab and continue going. Do you have to pay capital gains taxes on that profit earned or is that considered 1031 exchange 

[Denise Evans]

If you have a business plan that says you will flip properties until you build up enough cash to invest and hold, and if you in fact do that, then the IRS will consider you an investor, not a flipper.  BEWARE, though, you can't just write a business plan and expect the IRS to take your word for it. You must actually save most of the profits from your flip, and you must have some other source of income with which to pay your normal living expenses.

If you meet those requirements, you can take advantage of section 1031.

Investors get the benefit of Section 1031, depreciation deductions, long term capital gains tax treatments, and favorable tax treatment for seller financed sales.

Flippers are called "dealers" by the IRS. Dealers are like WalMart. They buy and sell an inventory of products. For WalMart it is groceries, soft goods and household goods. For dealers it is real estate.

Dealers do not get any of the investor tax benefits described above.   They must pay ordinary income tax rates on profits and must also pay self employment taxes.  But, dealers get to deduct mileage and other expenses, can use Section 179 to write off 100% of the cost of full bed trucks in the year of acquisition and up to $25,000 of the cost of other vehicles, can use Section 179 to write off the cost of computers and other business equipment entirely in the year purchased, and generally can take a lot of business expense deductions. Investors are pretty much limited to expenses related to the real estate itself, such as taxes, repairs, insurance, legal & accounting, property management fees, etc.

All of that is said for educational purposes and is not tax advice.  It is intended to give you a head start for a meaningful discussion with your tax professional.