Using a flip to purchase a multifamily property with a 1031 exchange

[Jonathan Krauser]

After doing several flips in the last few years, I am tired of my profit being taxed as short-term profit.  I usually purchase properties in the $200K to $250K range for cash.  My rehabs have averaged anywhere from $120K to $175K, so I end up with a lot of my cash in these properties.  Ideally, I would like to use a 1031 exchange to sell the flip and purchase a multifamily.  My goal is to end up with a multi-family home with a new mortgage on it and pull most of my cash back out to be used for the next deal. How do I do this the proper way?  

[Dave Foster]

@Jonathan Krauser, The best idea is to slow your flip roll just a little. and instead of buy fix and flip. You buy fix rent and refinance. (the ubiquitous BRRRR strategy). Using a refinance lets you get your cash back so you can either pay yourself with non taxable dollars (from the refi). Or it lets you buy your next target to work on while you wait for the current property to season a bit. You do have have the intent of holding that property for investment use (not fix n flip) if you want to 1031. But if you've held it for a year generally folks feel like that is fine.

Unfortunately The attorney's for the 1031 were not correct (really a bummer).  Because you can take cash out of a 1031.  and you can purchase less than you sell.  You simply pay tax on the difference.  We process these partial exchanges all the time.  The exchanger looks at their needs and any unused tax writeoffs they may have.  And then we hold back some of the cash from the 1031 to go to them.  It's many times not taxed at all because they have carryover losses.  That would have been the next option for you to look at.

Bottom line - there's no reason to pay any tax - let alone the exorbitant ordinary income tax if you have the time to plan.