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Flipping over 1031 Exchanges

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.] [1]

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. [2]

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.