Can Dealers do 1031 exchanges?

Dealer property is not eligible for any of the tax savings techniques that investment and business property have, such as lower capital gains tax rates, use of the pay as you go installment method of reporting taxable gain, and Section 1031 like kind exchanges, regardless of what is done with the proceeds.

Determining when a person or property crosses the line from investment to dealer is one of the grayest issues in taxation in the USA.  There is no definitive definition in the tax code; so each case is evaluated on its merits.

Having dealt with this very issue in hundreds of cases over the past 25+ years, I have learned quite a bit about what factors are most important.

Contrary to popular belief, neither the number of transactions nor the amount of money is a deciding factor.  What is most important is the amount of time spent on the property deals.  If it's a full time endeavor, you are a dealer.  If you have a full time occupation and dabble in real estate investing on the side, you can qualify for the special tax breaks.

Subdividing property does not automatically make someone a dealer.  A prudent and wise investor is supposed to maximize the profits from his/her investments.  Selling large parcels of property in smaller units is a well known method of increasing the overall profits considerably.    However, if you quit your day job and spend every waking moment on a bulldozer, you have gone from an investor to a dealer status in the eyes of the IRS.

It's not an all or nothing determination.  A person can own both dealer property and investment property. 

This is definitely one of those areas that scream out for the assistance of a creative and knowledgeable tax advisor for assistance.