1031 Exchange - investment property qualification

[Teresa Wang]

I purchased a small house in 2018 and rented it out from Aug 2019 - Aug. 2020 to my sister to use as storage.  In Aug. 2020 to now, I tore it down and rebuilding a bigger house on the property.  Since I rented it out before I did the fix and flip, would this property be treated as an investment property for the purposes of a 1031 Exchange?  

[Bill Exeter]

Hi @Teresa Wang, 

It all boils down to your intent.  Can you demonstrate under audit that you bought the property with the intent to hold for rental purposes, or did you buy the property with the intent to tear down, rebuild and then sell (flip), which would be considered held for sale rather than held for investment and not qualify for 1031 Exchange treatment.  The IRS could also take the position that your intent changed from held for rental to held for sale.  You should discuss with your tax advisor as to your intent and how defensible your position is.