Real Estate INVESTOR, or Real Estate DEALER?

Turn on the television these days and you will see numerous reality programs following the lives of people who ”flip” properties for profit. This involves purchasing a property, doing repairs, and quickly selling, hopefully, for a profit. If you analyze this practice from a 1031 Exchange perspective it can be used to illustrate an important requirement for a successful exchange: the properties must be of like-kind.

A property that is flipped can be considered inventory property, or property intended for resale, and is therefore not like-kind to investment property, property held for use in business or trade, or for appreciation. Someone who actively buys and sells real estate may be considered a dealer by the IRS, and the inventory they are trading are the properties. If an investor was to purchase the same property as a dealer, do the same repairs, but then rent it for a length of time, it could be classified as investment property and qualify for a 1031 exchange.

There are many factors to consider when making the determination of like-kind and I will go into greater detail in future entries.