May a taxpayer use exchange proceeds to buy property he/she intends to flip, or use as a personal home/second home?
In order to qualify for non-recognition under ยง1031, both the property transferred and the property received by the taxpayer must be held either for productive use in a trade or business, or for investment. A taxpayer will not obtain tax deferred treatment if the exchange involves the sale or purchase of property used for personal use (such as residences and vacation homes) or property held primarily for sale to a customer in the ordinary course of its trade or business (such as a real estate dealer or developer). The taxpayer’s intent at the time of purchase controls, and the IRS will consider various factors in an attempt to determine intent, such as the duration of ownership, extent of taxpayer’s efforts to sell the property, amount of development and improvement, advertising and frequency of sale of other real estate.
Related Questions
- What happens if the taxpayer is in escrow to sell the relinquished property and then decides the want to make it part of a tax-deferred Exchange?
- May a taxpayer use exchange proceeds to construct improvements on property he/she already owns?
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