Can I do a 1031 exchange on flil properties?

[Lance Riggen]

We are working on our 4th flip and have a lot to divide and build 2 homes on currently. I have learned a little about a 1031 exchange and figured that would be a good fit for our business.

However I recently talked with a more experienced investor/rehabber and he said that I couldn't do a 1031 exchange if flipping was my primary source of income. Which it currently is not.

Any insight would be helpful!

[Dave Foster]

@Todd Powell and @Lance Riggen, You've both gotten some good and some not so good info.  The 1031 can only be used with property you have purchased with the intent of holding for productive use.  Property you buy primarily intending to sell (flip) does not qualify.   That part of the info is good.  But it has to do specifically with that particular property and your intent on that property.  That's where Lance's friend is mistaken.  You can be a flipper all day long.  But if you own a property that you have held with the intent of productive use then that property qualifies whether or not you are a flipper by trade.  However, your bar to demonstrate your intent might be higher given the way you treat other properties.

And there is no statutory holding period only what you can use to demonstrate your intent to hold.  And while most folks feel comfortable at anything more than a year there could always be scenarios where a hold time that is shorter (or longer) might be justified.

The easiest way for flippers to still get to use the 1031 is to change your model slightly.  @John Thedford referenced it. First eliminate the word flipper from your lexicon.  You're an investor who buys to hold for productive use.  Think of yourself that way and your actions will follow.  Instead of buying fixing and flipping slow it down just a little.   Buy fix rent and then evaluate.  When the time is right then you will be able to do a 1031 because you have demonstrated your intent to hold for productive use.

And since I realize that a little bit of the allure of the flip is multiple transactions quickly and the adrenaline rush of the the deal there's a way to still get that too.  While you are "seasoning" your properties you can also refinance them and pull the cash out to buy and fix your next property.  Maybe by the time you've got this property in service you're just in time to sell the first property and do a 1031 into one or two new value add holds.    See the progression?

One last misunderstanding - Todd whoever you were talking to about "like kind" is wrong.  Like kind refers to the use of the property not the nature or type of property.  Any type of property that has been held for productive use can be 1031d into any other type of property - residential to commercial is fine. as is agricultural to residential  or SF to MF or industrial to vacation rental - it all works.  And the number of properties doesn't matter either.  So sell one and buy two.  Or sell three and buy one.

1031's a lot more flexible than folks think.