According to an interesting article in today’s WSJ article “A real estate speculator’s surprise,” many real estate investors don’t understand the proper use of 1031 exchanges [Note: Pd. Sub.]
A person who sells real estate can defer capital gains obligations by rolling their gains into a similar piece of property. Also called a like-kind exchange.
The problem is that many investors are flipping their properties so frequently, especially in certain markets like Miami and Las Vegas, that the IRS can interpret their activity as a business, and therefore subject to other taxes. This could catch many of these investors by surprise, especially if the boom cools and the margins on flips evaporates.
Tags: 1031 Exchange
It is also my understanding that the proceeds from a property sale must be rolled into a higher value property (than the original) or set of propertys. Also, to qualify as capital gains, you must hold the property for one year; and if you do this alot, the gain might be catagorized not as capital gain but as ordinary income because you have become a dealer.
Sometimes it’s worth just taking the capital gains hit, it’s less than ordinary income tax and gives you freedom not to rush into another property for the sake of performing a 1031 exchange.