Investors that make a quick sale – and profit – may or may not be able to defer capital gain tax on their profit by utilizing a 1031 Exchange.
May or may not – how’s that again?
Basically, if the taxpayer’s initial intent is to hold the property for investment purposes or “productive use” in the taxpayer’s business and meant to be “primarily for sale,” then a 1031 Exchange may qualify. In most cases, however, properties owned by builders, developers, and rehabbers are considered to be “primarily for sale,” the IRS will examine the intent of the buyer in every instance.
So, how does the IRS make this determination? They use a number of determining factors to gauge the presence – or absence – of a qualified intent. These factors include:
- The number and frequency of real estate transactions by the investor
- The development “activity” of the buyer
- Efforts by the taxpayer to sell the property
For a much more detailed analysis and explanation of each of these factors, please see the excellent article of 1031 Insider.