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Updated about 5 years ago on . Most recent reply
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ELI5, why do people put profits into a 1031 vs a tax write off
Simply put, why do real estate investors need to put their profits on something like a flip into a 1031 exchange rather than simply putting the profits into a new property and writing off the acquisition like a normal business would? When McDonald’s makes a profit on a hamburger, they don’t have to enter the framework of something like a 1031 exchange to avoid paying the taxes on the profit and using it to buy more hamburgers, they just write off the acquisition of more hamburgers and don’t pay taxes on it until they eventually decide to step out and stop their continuous acquisition of more profitable hamburgers. Other than when a property can’t be found before the end of the tax year, is there a reason I’m not aware of that says you can’t make $40k on a flip and use buy 2 houses for $20k + hard money and avoid taxes rather than having to abide by the rules of a 1031 exchange?
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Originally posted by @Mitchell Rusten:
Simply put, why do real estate investors need to put their profits on something like a flip into a 1031 exchange rather than simply putting the profits into a new property and writing off the acquisition like a normal business would? When McDonald’s makes a profit on a hamburger, they don’t have to enter the framework of something like a 1031 exchange to avoid paying the taxes on the profit and using it to buy more hamburgers, they just write off the acquisition of more hamburgers and don’t pay taxes on it until they eventually decide to step out and stop their continuous acquisition of more profitable hamburgers. Other than when a property can’t be found before the end of the tax year, is there a reason I’m not aware of that says you can’t make $40k on a flip and use buy 2 houses for $20k + hard money and avoid taxes rather than having to abide by the rules of a 1031 exchange?
1) You can’t put profit from from flip into 1031. 1031 is not for an ordinary income.
2) no, reinvesting the profit into another property is not going to give you write off. The profit you make from one sale is taxed even if you reinvest into another property.
What you are describing is not normal in the flip business. Let’s say you made 10k in one flip and then go buy another property with that flip profit. you still will be taxed on that 10k as you can’t deduct the purchase price of the 2nd property when you buy it. If you happen to sell the second property, it will generate its own profit. So you have profit from two flips.
If one flips gives you 10k and other gives you -10k, the net is zero, then you don’t have income. But why flip two houses and still make no money? That’s happens when you are in bad luck.
Bottom line is reinvesting money doesn’t give you tax shelter.
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