Updated about 2 years ago on . Most recent reply
Newbie Tax Question
I am planning to purchase a foreclosure this week for $161,000 and put $20,000 into it with the hopes of it appraising around $250,000. My original plan was to flip the property and sell it for a quick $40,000 or so. The main reason for this is because the BRRRR strategy will put me in the red on Cash flow by about $200/month with the mortgage to pull all my $ out.
Looking into the taxes on a fix/flip it looks like (based on my tax bracket) that I will pay 12% ($4,800) in short term capital gains tax if I sell it before one year of ownership. However, if I were to keep it for a year (and rent it out), I would actually pay $0 in long-term capital gains tax.
If I'm correct about all of that, by holding the house for a year, it would save me $400 per month. So even if I'm in the red on cashflow by $200/month, it still makes more sense to hold it with the negative cashflow to save the $ on short term capital gains tax.
AM I LOOKING AT THIS CORRECTLY?!?!
Most Popular Reply
Sounds about right... I guess your income is very low to be in the 12% bracket. Also, flip income/profit is active income, so its subject to self-employment tax. That's another 15.3% if I remember correctly (FICA x2).
By renting for a year, you'll also have to pay back the depreciation, but that should be something of a wash since it was just the one year. It'd be a small amount based on your price point so shouldn't affect your bracket most likely.
Its just a risk profile difference between the two. Also, you don't get your money back for a year. And now you have to deal with a tenant.
What if you sold now, and did another 2 or 3 flips? Would you be ahead or behind? paying zero tax may be nice, but paying tax also can mean you are making money. you should be maximizing your take home income, not minimizing your tax.
now lokoing back at it, why isn't your profit closer to $69k, or maybe $60k? I know this is a public board, but you have no other income? Even with the std deduction, you are very close to breaking the ~$45k bracket limit.
If you truly have zero income, don't forget the first bracket is 10%. Its a marginal tax bracket. So dpending if you are single or married, that first ~10k or $20k is taxed at 10%. Then, the rest is taxed at 12%, until you hit the next bracket.
Of course, consult a professional.