Reinvest Gains VS 1031 Exchange

[Tim Lynch]

From a tax perspective are there big differences between a 1031 exchange and reinvesting gains within the same tax year?

I buy and sell property with an LLC and just closed on a flip with a $60k profit. The sale price was only $325,000 so if I was to complete a 1031 exchange I would have to buy a property worth more than that, and the down payment would be more than the profits earned. So not only are all profits tied up into the new property, but so are a lot the previous out of pocket expenses.

I understand the benefit of a 1031 is to defer the capital gains to a later sale but what if I was to reinvest all the gains into another property? If my LLC takes the $60k profited on this flip and purchased a property with it the LLC wouldn't show a gain for the year. Thus, would any capital gains be owed on the flip? It's my understanding that capital gains are realized on an LLC on an annual basis rather than on a per project basis. Is that correct?

Thanks for any insight!!

[Wayne Brooks]

You need to sit down with a cpa.

Flips are not eligible for a 1031, which is only for investment property held for long term.

Flips don’t result in cap gains tax, the profit is taxed as ordinary income added to your other income, plus self employment ss/med tax.  

Buying another property, flip or investment, isn’t an “expense”.  With a flip, you only report the profit once it is sold, gross minus expenses.  Your rehab expenses are not a deductible expense as you spend the money, all accounting is done at the end when you sell.

It doesn’t matter what you do with or how you spend the flip profits, they get taxed for that year.

An llc doesn’t file it’s own tax return, the profit, losses or cap gains flow through and get added to your personal tax return.