Friday, September 16, 2005

1031, Professional Advice, and Real Estate Flip Deals

Real estate investors who quickly buy and resell properties, while declaring the transactions under Section 1031 of the Internal Revenue Service Code, could find themselves being audited.

In a 1031 Like-Kind Exchange, investors can defer capital-gains taxes when they sell a business or investment property by sinking the profits into a comparable property right away. However, they cannot use the proceeds to purchase a primary residence or vacation home. The profits must be put into an escrow account, not taken as cash.

Investors "flipping ' properties in less than a year risk being taxed at a rate of 35 percent, as those 1031 Like-Kind investors looking to qualify for the capital-gains tax rate of 15 percent must hold onto their properties for at least one year.

As you know, we urge our 1031 clients to speak with1) a Qualified Intermediary 2) a CPA or tax attorney to ensure that they understand the rules prior to making a real estate investment.

INTERESTING: A recent study by First American Real Estate Solutions, meanwhile, shows why flipping has become so popular. Those who flipped properties in Las Vegas, Miami, and Orange County, Calif., within three to six months of purchase between 1999 and June 2005 achieved a rate of return that exceeded the market appreciation rate by 20 percent to 40 percent.

Source: Wall Street Journal (09/14/05); DeBaise, Colleen

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