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House Flipping and 1031 Exchanges Do Not Always Mix

House Flip | Layman & Nichols

By Dean ‘Mac’ Nichols, Attorney

House flipping may be considered a type of real estate investment by those who do it, but did you know that it generally doesn’t qualify for 1031 treatment?

IRC Section 1031(a)(1) states that “stock in trade” property, or property “held primarily for sale” is explicitly excluded from qualifying as a 1031 exchange. Property held primarily for sale, according to this, is not the same as property held for investment.

These factors can help determine whether a property is held primarily for sale:

• The purpose for which property was acquired
• The purpose for which property is currently held
• The purpose for which property was held at time of sale
• The primary business/occupation of taxpayer
• The extent to which improvements (if any) were made to property by taxpayer
• The number/frequency/continuity of sales by taxpayer
• Whether or not property is listed with brokers
• The extent of advertising or other active efforts to solicit buyers

That’s not to say that there are not any properties acquired for sale that can qualify for 1031 treatment. For example, a property acquired with the intent to sell can potentially qualify if it is converted into a rental for at least a year, preferably two. You can also move into the property as a primary residence for at least two years, then claim exclusion under Section 121. However, it is important to recognize that the exclusion will be allocated to account for the time in which the property was not used as your primary residence.

If you’d like to see if you or your property qualifies for 1031 exclusion, give us a call. Ask us about house flipping and 1031 exchanges today. We’d be happy to walk you through any questions you have about your circumstances.

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