Glossary
1031 exchange
A 1031 exchange lets you defer the tax on a gain when you sell real estate held for investment and buy other investment real estate. The money must go through a qualified intermediary and you must meet strict deadlines.
Section 1031 of the tax code covers like-kind exchanges of real property held for business or investment. Rentals usually qualify. Property held mainly to resell, like a typical flip, usually does not.
The deadlines
- Day 0: you close the sale. The proceeds go to a qualified intermediary, not to you.
- Day 45: identify the replacement property in writing.
- Day 180: close on the replacement property.
- Sale price
- $400,000
- Adjusted basis
- $250,000
- Selling costs
- $24,000
Simplified. Depreciation recapture, boot and debt replacement change the math.
Run The Deal estimates taxes on a flip's profit in the flip calculator; see house flipping taxes for why flips are taxed differently.
Questions
Can I do a 1031 exchange on a flip?
Usually not. Property held mainly for resale is generally not held for investment. Ask a tax advisor about your situation.
What happens if I miss the 45 day deadline?
The exchange generally fails and the gain becomes taxable. That is why investors line up replacement options before they sell.
Written by Austin Frangoules | Updated
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