1031 exchange or tax deferring?

Question

Hello all! I am going to sign contracts on my first flip on tuesday. We did well and made big profits and the experience was incredible. Now I want to avoid paying taxes if possible.

Do any of you more experienced flippers have any suggestions or advice on how to defer taxes? I have about 12k I will have to pay to taxes right now unless I find a way to not pay.

I definatly will be buying another property which may be another flip or a multifamily buy, rehab, rent and hold. It really depends on what I can find on the market. Thank you all.

Dave Foster · Answer

@Robert Gailie, The biggest issue as you can see from the response on this thread is your use of the word "flip". That word implies a common usage and describes a property that you bought with the primary intent of reselling. That property does not qualify for 1031 treatment.Property that qualifies for 1031 treatment is property that you buy with the intent to hold for productive use. Your description of your intent to hold it as a rental could certainly be interpreted that way. But you want to make sure you have as good a paper trail demonstrating that intent as possible. Correspondence with your accountant. A contract with a property management firm. Advertisements for rent etc etc. There is no statutory holding period that makes it qualify but in general the longer the better. In your case you'll want to be able to show the extenuating circumstances that are making you sell now rather than holding as was your original intent. Make sense?It's not OK to buy it with the intent of reselling and then 1031 it. It is OK to buy it with the intent of holding it for productive use and then change your mind and sell it and 1031. The burden of proof will be on you. Was this really an accident and your pattern is buy and hold? Or do you have these "accidents" several times a year. Your actions will demonstrate your intent. But you definitely want to quit using the term flip if that's not what you're doing.

Wayne Brooks · Answer

You'll likely be paying more than $12k on $50k......as it is flipping income, you'll also be paying the 15.3% SS/Med self employment taxes.

Alison Koenig · Answer

And maybe find a new accountant. Thanks for the post, lots of good insight from the responses. Congrats on your first flip and being so successful on it!

Bill Exeter · Answer

Hi @Robert Gailie, The 1031 Exchange can not be used with rehab/flip transactions as only properties that are bought with the intent to hold for rental, investment or business use qualify for 1031 Exchange treatment. Properties that are acquired with the intent to rehab and flip are considered inventory in your real estate business and are not held for investment purposes and do not qualify for 1031 Exchange treatment. It would qualify if you bought with the intent to rehab and then hold as investment property.

Robert Gailie · Answer

I figured after all expenses including tax I would be around 50k the self employment taxes and what not I did not know about. My accountant I do not like very much. It's hard to find a good accountant that wants to work for you.

Robert Gailie · Answer

well if you look at my paper trail anyone could assume that I am clearly flipping. As I said we intended to rent but as the project was near completion we had changed our minds so we never really started looking for tenants. My accountant told me that I can do a 1031 exchange and I do believe he is wrong as I have heard that there is no way to avoid taxes on flips. So basically I am going to have to eat the tax burden which is ok as my net profit for my first flip should be around 50k. We signed contracts today and should be closed within a week.

J Scott · Answer

Yes, but if you're flipping out of a retirement vehicle, you'll need to refrain from having active participation in your projects. Generally speaking, you can't personally benefit your retirement funds and your retirement funds can't benefit you personally (until withdrawal).Also, you can't commingle retirement funds with personal funds -- all funds must come from you or your retirement account.And you obviously won't have access to any profits (without penalty) until you're of legal age to withdraw.

Robert Gailie · Answer

I actually did buy this property to rent it but it came out way to nice for a rental in this area so we decided to sell it. I have heard of a self directed 401k being a tax deferring way of keeping your money.

Alison Koenig · Answer

I don't know a lot about this, but JUST listened to podcast 162 with Amanda Han...what about a self-directed 401k?

J Scott · Answer

Not sure what you mean...can you give an example?