Mulitple sales into one purchase?

Question

Newer investor here! I understand that once you sell a property and put the profits into a 1031 Exchange, you have 45 days to identify the property you're going to put the money towards and 6 months to complete the exchange. I am wondering if it is possible to add additional capital to an existing exchange in that time frame. So for example.

I have a property in mind that requires a 60k down payment. I have two flips that are on the market to sell. The first sells right away with 30k profit, so I enter it into a 1031 exchange. The second sells a few weeks later (still w/in the 45 day range) for another 30k, can I combine the second profit into the same exchange, or can I do multiple exchanges into the same property, so that I can use the profits from both flips to get into the property I want to purchase?

Colleen Carnahan · Answer

@Dave Foster, good advice and a strategy to consider! Thank you.

Dave Foster · Answer

@Colleen Carnahan, There's no reason some of those rehabs wouldn't make good holds.  There's also no reason why extending your hold period can't boost your return.  A common model that has evolved over time is to purchase those rehabs with the intent of holding - so buy fix rent.  Then refinance and pull the cash out to keep the parts moving while you evaluate the current property for the right time to sell/1031 or keep holding.  Intent can change but the sooner it changes the more suspect the original intent is.

Bill Exeter · Answer

Hi @Colleen Carnahan,

No, it is the intent on both the relinquished property and the replacement property that counts. Properties acquired and held for rehab/flipping is treated as inventory in your real estate business and not property that is held for rental, investment or business use, so they would not qualify for 1031 Exchange treatment.

Colleen Carnahan · Answer

@Bill Exeter, Thanks for the information! Just to clarify, only the property being bought is under consideration for the intent to hold clause of the 1031 exchange correct?

We are using our own money and loans to get into the rehabs, but want to use the profits from those sales to fund down payments for our buy and holds.

Bill Exeter · Answer

Hi @Colleen Carnahan,

You can certainly combine multiple relinquished properties into one replacement property.  The two relinquished properties do NOT have to be in different or separate 1031 Exchange transactions, especially if they close relatively close together.  They can be set-up in the same 1031 Exchange transaction/file.  It is important to note that the first closing will trigger the 45 and 180 calendar day time periods if both relinquished properties are in the same 1031 Exchange.

You can also consider setting up separate 1031 Exchanges if you want separate 45/180 day deadlines for each sale, but it will increase the costs via 1031 Exchange fees.  Separate 1031 Exchanges with separate relinquished properties can still acquire the same replacement property, but then you would need each 1031 Exchange to identify a percent of the target replacement property since they are set-up in separate 1031 Exchanges.

However, if you are truly acquiring the properties with the intent to buy, rehab and then sell as quickly as possible - or flip - the properties, then they will not qualify for 1031 Exchange treatment.  Properties must be acquire with the intent to hold for rental, investment or business use in order to qualify for tax-deferred exchange treatment.  Properties acquired to flip are actually held for sale and not for investment and will not qualify for 1031 Exchange treatment.

The critical element is your intent to hold for rental, investment or business use.  The amount of time does not determine whether you qualify for 1031 Exchange treatment, but it can go a long way to demonstrate that you did in fact have the intent to hold for rental/investment purposes.

Colleen Carnahan · Answer

@ Dave Foster, thanks for the heads up on the holding requirements for a 1031 exchange. I was not aware of that. So far all I've owned are buy and hold properties, so am still learning how things work differently on the flip side. Appreciate you taking the time to answer!

Dave Foster · Answer

@Colleen Carnahan,  Each sale of a property starts it's own 1031 exchange.  But it is perfectly fine to combine exchanges to purchase a larger property.  You do have to pay attention to your timelines since each sale will have it's own 45 and 180 day period.  You also have to make sure that you're meeting the reinvestment requirements.  if you sell one for $200K and you sell the other one for $100K you need to purchase at least $300K in real estate to defer all tax.

The reverse is true as well.  You can sell one property and buy more than one replacement using your proceeds as down payments.  And you can always add cash from any source to minimize or eliminate the need for a mortgage.

Of course though we've got to address your use of the dreaded 4 letter word "flip".  Buy and hold posters are flying around the room pointing fingers at you and chanting hexes.   If your intent when you purchased these properties was primarily to resell them (the normal usage of "flip") then you cannot do a 1031 exchange.  In order to be eligible for 1031 exchange you must be selling property that it was your intent to hold for productive use in trade business or investment and purchase property that it is also your intent to hold for productive use in trade business or investment.

What's the holding period?  There isn't one.  Longer is better than shorter.  But length of hold is just one standard by which you can demonstrate intent.  Most folks will feel comfortable at more than a year.  But here could always be circumstances that warrant a shorter (or longer) holding period.