To Sell or to Rent in Arlington, Jacksonville, FL

Buying & Selling Real Estate
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To Sell or to Rent in Arlington, Jacksonville, FL

Thea Linkfield
Rental Property Investor · Jacksonville Beach, FL · Member since 2016 · 97 posts · 108 votes

I have a house in the Woodland Acres (32211) area of Jacksonville that was purchased for $47,300 cash. We are currently renovating it with about ~$30,000 in and when it's done it will be completely move-in ready with modern finishes to attract buyers. It's a 3/2 with 1229 sq ft. The original thought was to sell it for at least $100,000; and buy a new one with the profit. The more I look at related listings, it looks like we could get between $115,000-$125,000 for a house that we are tearing down the the studs and rebuilding with nice finishes and an open large kitchen. Assuming we can get $120000 for it, less $77300 all in, less $10000 closing costs, we'd be looking at $32,700 profit minus taxes. I need help calculating the taxes for this equation, so any guidance helps. 

I keep reading/hearing about getting taxed TWICE for flipping houses but I'm not understanding. I understand at the end of the year when you do your taxes the profit you make on the flips will be added to your yearly income and potentially bump you tax brackets, but where is the second tax? Also, having very little knowledge on the subject, I was hearing this 1031 thing being thrown around and thought I could just do that, but the more I read recently, because my intent when purchasing was to sell, 1031 won't be an option... can anyone argue that I could use 1031 in this instance? 

Comparables:

http://www.realtor.com/realestateandhomes-detail/8...

^NEW BUILD 3/2.5 1509 sq ft SOLD for $149,000 = $99/sq ft

http://www.realtor.com/realestateandhomes-detail/8...

^"NEW" 3/2 1229 sq ft SOLD for $130,000 = $106/sq ft

The other option would be to cash out refi and hold on to it for at least a year and rent it out.  3/2's in the neighborhood are renting for between $1000-$1100/month. With 77000 in that's about 1.3% of the 2% rule which seems to be as close as you can get nowadays. Conservatively assuming an appraisal would come in around $100000, we'd about break even when it comes to getting cash out and could reinvest the original money in a new place while getting passive income. Typing it all out it almost sounds like a no-brainer, but with 2 other people's money at play, people who were expecting 40% profit up front, convincing them to hold on to it for a whole year might not be so easy. 

I don't have a direct mentor so I'm just seeking seasoned investor's pros and cons of selling vs renting.

Thanks!

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  • Account Closed
    Investor · Jacksonville, FL · Member since 2014 · 186 posts · 34 votes
    9y

    @Thea Linkfield Kudos to you on doing a flip with some decent looking numbers!  Do you know Max?  He came to a meetup I did back in February and he and his wife have been doing flips over in Murray Hill.  

    You have alot of moving parts in your question, but basically the part about other people's money in play says it all.  No matter how good the cashflow might be if you held on and rented it, renting the place comes with its own headaches, and opens you up to anything unplanned that may go wrong over the course of the year.  Plus if you took the rental idea to your investors they may question how strong the deal was to begin with.  THEY  invested with the idea you were going to flip a house and they were going to make money over a short amount of time.  Respect that relationship first.  

    I can't directly answer the question on taxes, hopefully another flipper will chime in.  

    0Reply
  • Edwine Alphonse
    Investor · Milton, MA · Member since 2017 · 21 posts · 6 votes
    9y
    We are in similar situation with similar #s and about to close on a refinance option. We have a tenant in place for the year, but want to know what is most advantageous for us.
    0Reply
  • Thea Linkfield
    OP
    Rental Property Investor · Jacksonville Beach, FL · Member since 2016 · 97 posts · 108 votes
    9y

    Thanks for your reply @Account Closed You definitely hit the nail pretty close to the coffin. The other people involved are my dad and my boyfriend, but we are trying to structure the deal as professionally as possible. I brought them the numbers this weekend and because my dad was adamant about the neighborhood being D at best, there was NO CHANCE IN HELL he was entertaining the idea of renting in out. Even when I volunteered to be the property manager for free. 

    I do not know Max, but would be interested in talking with him and his wife, does he have a BP account?

    I'm still curious about the taxes and the possibility of a 1031 exchange so I'm hoping someone else chimes in on that point!

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  • Thea Linkfield
    OP
    Rental Property Investor · Jacksonville Beach, FL · Member since 2016 · 97 posts · 108 votes
    9y

    @Edwine Alphonse Are you planning on selling it after a year or will it be a long-term buy and hold property?

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Thea Linkfield and @Edwine Alphonse, there are some advantages to hanging on and turning it into a rental for a period of time. First, simply holding on to the property for more than a year with it in productive use will turn the ordinary income gain into a capital gain with a more favorable tax rate. Second, all of that tax can actually be deferred by doing a 1031 exchange when you sell. So you get to use all of your original capital and the deferred tax in your next project and on going. So the deferred tax really becomes a compounding advantage to you. Third, you will get to take a depreciation write off on your tax return. And of course you've already alluded to the passive income including your NOI and the principle pay down by the tenants not to mention any appreciation that may occur.

    On the other side of that I see two big stumbling blocks.  First you don't have investors on board.  And second it sounds like you may have fixed this house up for sale and not for rent.  So it may not be tenant proof.  And a year of tenants could wreck much of your rehab.

    The refinance strategy followed by a sale later when appreciation and cash flow have allowed you to get the cash together for yet another purchase can be a great strategy.  

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  • Thea Linkfield
    OP
    Rental Property Investor · Jacksonville Beach, FL · Member since 2016 · 97 posts · 108 votes
    9y

    I appreciate your input @Dave Foster ! I've seen you on other 1031 threads and was hoping you'd chime in! I definitely considered the fact that we were making it resale ready and not rent ready as well. 

    My question for you is hypothetical: If I'm to do say 5 flips a year each profiting $20,000, and with buying each next one with the profit of the previous one (i.e. not having more than one at a time); is there any tax strategy to defer taxes and only pay taxes on the final property profit I make ($20,000)? Or will I have to pay taxes on all of the $100,000 no matter what?

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    Thanks for the kind words @Thea Linkfield.  Unfortunately the news isn't good.  Each sale is a disposal of an asset that started with a basis and ended with a gain or loss.  So each sale triggers it's own tax.  

    In your case each time you sold you'd recognize the gain of $20K.  So even though you rolled the profit into the next deal, at the end of the year you would have 5 1099s for the property sales and your accountant would reconcile the basis plus expenses against the net sale.  So yep, all $ 1 mil.  

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