A 1031 exchange is used to defer taxes on the sale of your investment property when your proceeds are invested in a new investment property. Although you probably consider a house you bought with the intention of flipping to be an investment, it is not considered by the IRS to be a property that was bought for investment purposes and thus does not allow it to be used in a 1031 exchange.
Tax professionals recommend keeping an investment property obtained in a 1031 exchange for two years as a rental property. Some professionals will say that one year plus one day is sufficient for the 1031 exchange to avoid an IRS challenge.
In 2008 the IRS issued a safe harbor rule saying it would not challenge the 1031 exchange because of the sale of your replacement property if:
- You rent the dwelling unit to another person at a fair rental price for 14 days or more.
- Your personal use of the dwelling unit does not exceed the greater of 14 days or 10% of the number of days during the 12-month period that the dwelling is rented at a fair rental price. (Example: you rent it out for 332 days and use it for personal use for 33 days.)
Generally the IRS looks at your previous activity and any records relating to the use of your replacement property to decide if it was qualified to be used in a 1031 exchange.