Investor vs Dealer - 1031 Exchange

[Michael Power]

Growing our RE business in the US certainly has its growing pains. In structuring our entities, (we function in Florida, Georgia and soon in Texas), we have been informed that, "...your company is a dealer in real estate sales and purchases, not an investor (1031 exchange tax deferral is not allowed for dealers)".

A more detailed discussion will take place with our CPA, but I would like to hear from some others on BP who "deal" in rehabs within an LLC, s-corp or c-corp.

How are your 1031 exchanges handled? Is this an entity focused restriction, or an activity focused restriction? I see the reasoning on an individual basis, but how many flips does it take before you are considered a dealer?

Mike P.

[Bill Walston]

Originally posted by Michael Power:

How are your 1031 exchanges handled? Is this an entity focused restriction, or an activity focused restriction? I see the reasoning on an individual basis, but how many flips does it take before you are considered a dealer?

Mike P.

Mike - If you are doing a rehab, with the intent to sell for a profit ONE property will make you a "dealer." It's not the number, it's the intent: if you hold a property primarily for sale you are a dealer. If you are considered a real estate dealer, you have a trade or business - the income is earned income, you are not eligible for capital gains treatment, and the property is not eligible for a 1031 exchange. Bryan Hancock's suggestion to have one entity for "flips" and another for investing is spot on!