Question:
“We just bought a house to fix and flip and will do a 1031 exchange so we don’t have to pay taxes. So our question is…”
Answer:
Sorry, but I’ve got to interrupt. I’m about to make you very sad right now, but you’ll avoid much greater sadness later.
Per IRS rules, you cannot do a 1031 exchange on a “property held primarily for sale.”
You must have the intent to hold both the property you’re selling and the one you’re buying for investment or use in a trade or business.
Now you may be thinking, “How do they know my intent? I’ll just say that I intended to keep it, but things changed.”
In addition to that being dishonest, consider this…
If you get audited, the IRS will look at many factors to determine your intent, including:
- Why did you originally buy the property?
- What did you do with it?
- Did you at least make a good faith attempt to hold it for investment, a trade, or business?
- What improvements did you make to it?
- Do you often sell properties quickly?
- What business are you in?
- What effort did you make to find a buyer?
- What were you doing with the property when you sold it?
So if you’re audited, you’re probably going to get caught and have to pay taxes (and possibly penalties).
On the other hand, if you always hold your properties for a long time, but this one time a buyer came to you and made you an offer you couldn’t refuse, you may win if you are audited.
See your tax or legal professional.
