Rehab - 1031 - Rehab - 1031 ... Hold

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My end goal is to acquire several multi-family (4 plex) for cash flow to augment retirement income in a few years.

I had planned to acquire a SFH, rehab it, and then 1031 into another SFH and repeat this process until the accumulated gain could be used as the down for the multi.

However, after reading several related topics here, I am not sure if this process will work. Does it help that my intent is to end up with a property held for investment, or does each 1031 have to stand on its own?

I am also concerned about being classified as a dealer if I do 4 or 5 SFH per year, 1031 or not. If I am working full time at another job how many rehabs could I do per year without obtaining dealer status?

My thanks for any comments, suggestions.

Comments(4)

  • lildell8th August, 2003

    why not jump in n see how many you can do in 1 year first.

  • Catarand8th August, 2003

    I've jumped. Only one a year for the past three years. The first I held as a rental for 1 yr, the others I just paid the taxes at my rate.
    I do need to crank it up to get where I want to be. Just want to be a little smarter about how I do it.

  • DaveT8th August, 2003

    If you are engaged in real estate flipping, you ARE a dealer. Although, the IRS will never classify you as a dealer, the IRS will characterize each of your property transactions as dealer dispositions.

    Even if you do only one flip, your flip is technically a dealer disposition. As a dealer dispositionYour profit is taxed as active (ordinary) income,
    Your entire profit is taxed in the year of sale even if you sold on an installment method, and,
    Your property is not eligible to participate in a 1031 exchange
    Since the short term capital gains tax rate is the same as your ordinary income tax rate, the only real issue is active income versus passive income. Passive income is not subject to self-employment taxes, while active income is.

    My suggestion -- don't worry about being a "classified as a dealer" because if you are engaged in property flipping, you already are one. Worry instead about establishing the proper business entity (for you) to conduct your business to segregate your flipping activities from your rental property activities should you be engaged in both at the same time.

    Your CPA and your tax advisor are in the best position to advise you on which business entity is best for your personal circumstances.

  • wexeter10th August, 2003

    DaveT is right on the money. A taxpayer must have the INTENT to hold both the relinquished property and the replacement property as investment property. Your intent is clearly to flip and therefore does not qualify for 1031 exchange treatment.
    [addsig]

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