Investment Property Flip, Boot Tax Question...

[Dustin Keiswetter]

I am close to closing on my first flip. I have paid mostly cash along the way (year and a half) So I am needing to keep some cash out of the 1031 exchange. My question is if I bought the house for 10k and put 30k into it and sold it for 80k after closing costs, that leaves 40k im responsible for in capital gains, is that correct? So if I put 40k into the 1031 and keep 40k in boot money, when I get the tax form next year for the 40k boot can I then deduct my 40k expenses and improvement to zero out my tax bill?

Thanks for any advice!

[Bill Exeter]

Unfortunately, I have some bad news for both of you.  Properties that are acquired and held with the intent to rehab/fix-up and then sell/flip are considered inventory in a trade or business and do not qualify for 1031 Exchange treatment (nor capital gain taxes). 

@Dustin Keiswetter The $40K that you pull out would first be applied toward your taxable gain (if you qualified for the 1031 Exchange), so the 1031 Exchange in the facts provided above would not provide any benefit.  The costs that you put into the property increase your investment or cost basis in the property and can not be deducted.  The amount that you pull out was not reinvested and is therefore applied toward your taxable gain. 

@Account Closed The capital gain is for properties held as investment for more than 12 months.  Capital gain rates do not apply to properties that were acquired for rehab purposes even if you cross over the 12 month mark.