1031 Exchange Guide: Learn the Facts About Dealer vs. Investor Status | DST Investment

When it comes to 1031 exchanges, there are two main types of participants: dealers and investors. But what’s the difference between the two? And which one should you be if you want to take advantage of a 1031 exchange? It’s common for people to mistakenly believe that they should be a dealer in order to qualify for a 1031 exchange. However, the IRS actually has different rules and regulations for dealers and investors.

In this article, we’ll explain the key differences between dealers and investors in a 1031 exchange. We’ll also provide some tips on how to determine your status and what to do if you want to change it.

What is a 1031 Exchange?

A 1031 exchange is a tax-deferred exchange of investment or business property held for productive use in a trade or business or for investment. The like-kind exchange allows investors to sell a property, reinvest the proceeds in a new property and defer all capital gains taxes that would otherwise be due on the sale.

In order to qualify for a 1031 exchange, you must meet certain requirements set forth by the IRS. These requirements include using a Qualified Intermediary (QI), identifying potential replacement properties within 45 days of the sale of the relinquished property, and completing the exchange within 180 days of the sale of the relinquished property.

What is Dealer Status?

The first thing to understand is that there are different rules for dealers and investors in a 1031 exchange. A dealer is defined as someone who is in the business of selling properties, such as a real estate agent or developer.

If you are considered a dealer, then you will not be able to defer your capital gains taxes through a 1031 exchange. This is because the IRS views dealers as people who are “flipping” properties and not investing for the long-term.

What is Investor Status?

Investors, on the other hand, are people who are buying properties to hold onto for the long term. The IRS views investors as people who are looking to grow their wealth through appreciation or income from rents.

If you want to qualify for 1031 exchange treatment, then you must be an investor. This means that you cannot have the intention of selling the property within a short period of time. The property must also be held for investment or business purposes, such as generating rental income.

So, how do you know if you’re considered a dealer or an investor? The IRS looks at a few different factors to determine your status. These include:

  • The frequency of your transactions
  • The manner in which you hold title to the property
  • The nature of the properties that you exchange
  • Your intent for holding the property

If you frequently buy and sell properties, then you will likely be considered a dealer. On the other hand, if you only exchange properties every once in a while and hold onto them for the long term, then you will probably be considered an investor.

It’s also important to note that the type of property you exchange can impact your status. For example, if you exchange vacant land or raw land, then you will likely be considered a dealer. This is because these types of properties are typically bought and sold more frequently than other types of properties.

The bottom line is that your intent for holding the property is the most important factor in determining your status. If you plan on holding the property for a long time, then you will probably be considered an investor.

How to Determine Your Status

If you’re not sure whether you’re considered a dealer or an investor, then you can always ask the IRS for a ruling. To do this, you will need to submit Form 8594, which is the Asset Allocation Statement.

This form asks questions about your intent for holding the property, the frequency of your exchanges, and the types of property that you exchange. Based on your answers, the IRS will determine your status.

What if You Want to Change Your Status?

If you want to change your status from dealer to investor, then there are a few things that you can do. First, you can stop exchanging properties for a period of time. This will show the IRS that you are no longer in the business of flipping properties.

You can also hold title to the property in a different way. For example, if you currently hold a title as an individual, you can change it to a corporation. This will show the IRS that you are holding the property for investment purposes.

Finally, you can exchange properties that are not considered “flips.” This means exchanging properties that are not vacant land or raw land. By doing this, you will show the IRS that you are investing in properties that are meant to be held for the long term.

Remember to Consider Dealer vs. Investor Intent

When you’re doing a 1031 exchange, it’s important to remember the difference between dealer and investor status. If you are considered a dealer, then you will not be able to defer your capital gains taxes. This is because the IRS views dealers as people who are “flipping” properties and not investing for the long-term.

On the other hand, if you are considered an investor, then you will be able to defer your capital gains taxes through a 1031 exchange. This is because the IRS views investors as people who are looking to grow their wealth through appreciation or income from rents.

So, before you start your 1031 exchange, make sure that you understand the difference between dealer and investor status. This will ensure that you are making the most of your exchange and taking full advantage of the tax benefits.

The Bottom Line

If you want to defer your capital gains taxes through a 1031 exchange, then you must be an investor. This means that you cannot have the intention of selling the property within a short period of time.

The most important factor in determining your status is your intent for holding the property. If you plan on holding the property for a long time, then you will probably be considered an investor.

If you want to change your status from dealer to investor, there are a few things that you can do. You can stop exchanging properties for a period of time, hold title to the property in a different way, or exchange properties that are not considered “flips.”

Remember to consider dealer vs. investor intent when doing a 1031 exchange, as this will impact your status and determine whether you can defer your capital gains taxes. Reach out to our team if you have any questions about this process!