Can I exchange a Fix-n-Flip...?

In short, probably not. Some people do 1031 exchanges on fix-n-flips, but it's risky.

So: why are they risky? The answer has to do with INTENT. §1031 of the Internal Revenue Code specifically EXCLUDES property that is “held primarily for sale” from a 1031 exchange.

The IRS defines investment property as, “that which is held for productive use or investment.” For instance, when you buy rental property, you’re intending to collect rent, take advantage of the tax benefits, and hopefully get some appreciation out of it. When you buy raw land, you intend to hold it for appreciation or future development.

But when you buy a fix-n-flip, you’re buying it for the sole purpose of reselling it once you’ve fixed it up. What qualifies your property as eligible for a 1031 exchange is INTENT to hold it for long-term investment. If audited, you may need to prove that intent. If you do a 1031 exchange on a fix-n-flip, you must be willing to accept the risk of the IRS disallowing your exchange.

You may have heard of people who’ve exchanged fix-n-flips, but you may not have heard about the people who weren’t so lucky and had their exchanges disallowed. If you get audited, and cannot prove investment intent, the IRS can disallow the exchange and make you pay the taxes you tried to defer (and possibly include penalties on top of it). But again, people do them, so it's your call.

Let us know if you would like to learn more about the rules and risks of exchanges involving fix-n-flips.

--The Experts