A recent article by IPX1031 Investment Property Exchange Services, Inc explained tax deferral under section 1031 when flipping houses. After all, in all those great reality real estate shows, houses are bought at a bargain, quickly rehabbed, then sold for a tidy profit. And that profit is used to buy the next property and on it goes.
According to the article, the property must be “held for” investment or for the buyer’s business or trade. Thus, if the “principal intent” is to sell – and most flipped properties fall into this category – then the property will be considered inventory and will not qualify for tax deferral under section 1031.
Thus, most flipped properties will be taxed at ordinary income tax rates. The article concludes with a warning: when judging whether your property qualifies for section 1031 tax deferral, weigh the benefit against a potential IRS audit, interest and penalties.