Flipping is a real estate transaction where before you buy a property your intent is to sell it soon after. Is flipping eligible for 1031 consideration? No and the answer is in the facts. Whether the property is held for proper purpose is the taxpayer’s burden of proof.
What is the qualified purpose requirement? IRC §1031 does not define “held for productive use in trade or business” or “held for investment.” Qualifying property must be held for investment or use within the taxpayer’s trade or business. The taxpayer’s intent or purpose for holding the relinquished or old property and the replacement or new property is determined when the exchange takes place.
How long the property needs to be held or better known as the holding requirement is one fact of many, and is not defined in the 1031 code. The Service takes the position that two years is sufficient. In addition, the Service views property acquired primarily to dispose of it, held for resale, rather than to hold for productive use in a business or trade, or to allow it time to season as an investment, a sale not an exchange or held for qualified purposes. The shorter the time held before or after an exchange, the stronger the facts must be to establish proper purpose or intent.
It is a slippery slope qualifying property for 1031 exchanges if the property is not held for the proper intent without supportive facts. Hold the property for at least a year and a day to qualify for long term capital gains tax.
A vacation home exchange now requires that the property is held for two years with 14 days of rental income in each of the two years as defined by Revenue Procedure 2008-16. Realtors, Developers, Building Contractors must watch that their property is not considered inventory or that they are considered a dealer which makes those properties ineligible for 1031s.
Contact Atlas 1031 Exchange as your Qualified Intermediary to learn more.
