1031 exchange

[yelena]

Hi,
I have a question. I am little confused with 1031 exchange.
Let's say I bought a "grey" house. Then I sold it through 1031 exchange and bought through 1031exchange a "red " house. Can I still sell this "red" house through 1031 exchange and then buy "green" house through 1031 exchange, then sell green and buy "blue"  and so on...?
Or If I bought "red" house through 1031 exchange, I can not sell it through 1031 anymore and all I can do is rent the "red" out?
Thanks a lot guys!

[Bud Branstetter]

1031 exchanges are for exchanging investment property.  That means rentals in most cases not rehab flips.  You can continue exchanging until you die then your heirs get the stepped up basis(FMV)

[Dave T]

Just to expand a little on Bud's response.  You are required to actually use the property acquired in an exchange for an investment purpose.  

You can do serial exchanges as long as the acquired property is used for an investment purpose for some period of time before relinquishing it in the next exchange.

I am doing an exchange next year where the relinquished property is property I acquired in a previous exchange 5 years ago.

[yelena]

thanks a lot!
what is the time frame? What if I flip 2-3 properties in one year? Will it be suspicious for IRS?

[Dave T]

I suspect so.  The IRS will determine from your pattern of activity that your intent all along was to act as a dealer to real estate.  All your exchanges will be recharacterized as taxable sales -- back taxes, penalties and interest will be assessed.

There does not seem to be a minimum holding period specified in the tax code, but some "experts" (to include Bill Exeter) on the subject recommend a one year holding period is sufficient.  

[yelena]

Dave, could you please recommend a book written by Bill Exeter on this subject please?