Flipping houses has become a popular way to make money in real estate. But here’s the catch: flips and 1031 exchanges don’t always go together. It really comes down to one thing, how you hold the property. Let’s walk through what that means for you.
Key Takeaways
- Not every investment property qualifies for a 1031 exchange — the IRS looks primarily at why the property was held, not just that it was an investment.
- A flip’s short holding period and quick-resale intent generally don’t meet the “held for investment” standard a 1031 exchange requires.
- The IRS tends to treat flipping as a business activity, while 1031 exchanges are reserved for property held as a long-term investment.
- A longer holding period, typically a year or more, helps support the case that a property was held for investment rather than resale.
- Leasing the property out or making only modest improvements, rather than a full flip-style renovation, can help demonstrate investment intent.
The 1031 Exchange Is Not for Every Investment Property
People often assume any investment property qualifies for a 1031 exchange. It doesn’t quite work that way. What the IRS cares about most is why you held the property in the first place.
Intent and Holding Period
To qualify, you need to hold the property for investment. A flip is a different animal. The whole point of a flip is to fix it up and resell quickly for a profit, and that short-term goal usually doesn’t meet the ‘held for investment’ standard.
Flipping vs. Investing: A Thin Line
The line between flipping and investing is thin, but it carries real weight. The IRS tends to treat flipping as a business, while a 1031 exchange is meant for property you hold as an investment. That single distinction often decides whether your property qualifies.
How a Flipped Property Can Qualify
- Give it time. How long you’ve owned the property matters. There’s no magic number, but holding it for a year or two helps make the case that it was an investment.
- Show your intent. Your actions speak too. Leasing the property out, or making only light improvements, can help show you meant to hold it for the long haul.
When the Rules Get Complicated
Cases like these can draw a closer look from the IRS. That’s exactly when it pays to talk to someone who does this every day. At WealthBuilder 1031, we’ll look at your specific situation and help you stay on the right side of the rules.
Get Help
Thinking about a 1031 exchange on a property you flipped? We’re happy to help. Call us at 888-508-1901 and we’ll walk you through how to stay compliant while getting the most out of your investment.
Disclaimer: This content is for informational purposes only and does not constitute legal or tax advice. Consult your tax advisor or attorney for advice specific to your situation.
Chris Peterson — Texas Licensed Attorney & Founder, WealthBuilder 1031
Chris is the Owner and President of WealthBuilder 1031 and a licensed Texas attorney. He graduated from Wheaton College and the University of Texas School of Law and speaks regularly to realtors, accountants, and title companies about 1031 exchanges. Learn more →
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