1031 Exchanges Can Help You Flip Real Estate

So you have it figured out: you’re going to make money flipping real estate. Buy, fix up, and sell for a profit. All of the profit that you make off one deal, you roll over into the other.

Except you can’t roll everything you make in one deal into another. That’s because all of that profit isn’t yours—it’s income, and it’s taxable. That leaves you with less money to use to make your next deal and when you do that deal, less to roll over the next, and so on. Taxes just kill your ability to roll over profits into another deal.

Defer Those Taxes

But there is a way around it, a way that won’t prevent you from ever paying taxes—it just will allow you to delay paying taxes on the profit that you make. It’s called a 1031 exchange. A 1031 exchange lets you roll over the taxes you would owe on one deal, into the next deal. And you can take those taxes on the increase in value on that deal into the next one.

Basically, a 1031 exchange allows you to “kick the can” down the road, constantly deferring taxes, so that you can utilize the full value of the increase in value of the property, or the profits you realize from the sale of a property to use on your next real estate deal.

When do you have to finally pay the taxes? There really is no timetable. The taxes will become due when you finally sell a property without buying a new one, or else, if you buy property that doesn’t qualify for the 1031 exchange.

And the 1031 exchange doesn’t just apply to selling property and buying a new one. It also applies if you want to take out an equity line on property and fix it up—you can access however much is in equity, and again, defer the taxes that you pay on what you took out, used or accessed just like you would have if you had bought brand new property.

Restrictions and Limitations

To qualify for a 1031 exchange, you need to take the money that you made on property that you sell, and buy new property with it, within 180 days. That gives you some time, if you aren’t ready to do an immediate flip deal, or you need more time to close on the new property.

The one main restriction on a 1031 exchange, is that it can’t be used for residential property that is your homestead. But that isn’t really a restriction at all, because most people wouldn’t be buying and selling over and over again for property they were living in anyway.

The property you buy and sell must also be a similar building. So, for example, you couldn’t sell a multi-officer commercial building and buy an investment single family home.

Need help with your real estate closings or real estate law? Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today.

Sources:

investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

rocketmortgage.com/learn/1031-exchange