1031 Exchange for Flipping

[Noah Condon]

Can/Should I use 1031 Exchange when flipping houses? Any down sides? Thanks!

[Dave Foster]

@Noah Condon unfortunately you can't use the 1031 for a pure flipping model.  The properties you are selling and buying in a 1031 must be properties you intent to hold for investment use.  If your intent it primarily to resell (the definition of a fix n flip) then you can't 1031 it.

But that being said, there are a bunch of my clients over the years who have shifted their model slightly so they can get the adrenaline rush of fixing and the tax deferral of 1031.  

It all comes down to the old BRRRR model - Instead of buying, fixing and selling, you buy rehab, rent and then refinance. The refinance frees up the cash to live on or to purchase your next "flip" immediately. Then you start the whole process over with that property while you wait for that first property to season a bit so you can demonstrate an intent to hold. Most folks feel comfortable with any hold of more than a year. So after that time while you're still accelerating your BRRR properties you start to sell the properties you were renting. And you use the 1031 exchanges for these and buy more "flip" candidate properties.

I've actually had clients who built up to 20-30 exchanges a year doing flips and value adds.  But their 1031s had all been owned for a year.  Lenders also loved them because there was growing cash flow from the rentals to provide more lendability.