Newbie Tax Question

[Ty Moore]

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?!?!

[Ty Moore]

Quote from @Kevin Sobilo:

Quote from @Ty Moore:

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?!?!

If BRRRR is your preferred strategy perhaps ask yourself how you can make it work before giving up so easily.

1. Most everyone expects interest rates to fall. If they fall 2% and then you refi, you would go from -$200/month cashflow to +$50/month cashflow!

2. If you think it will take a while for rates to come down, you could look for loans where you can pay points to buy the rate down. You may not be able to buy 2% off the rate, but buying anything off the rate will bring you closer to break even.

3. Can you do anything to adjust the rehab costs? Adjust the scope of work, change finishes, manage tradespeople yourself versus using a GC, do some work yourself, etc. There are often things we do because we want to do them where we could do it differently and take advantage more. If you could cut the budget even $5k and combine with #1 or #2 this could suddenly work ok as a BRRRR deal.

If you can make this a workable BRRRR deal over time it can be worked to be better and better. Over 5, 10, 15 years you may refi multiple times to get a lower rate AND TO SPREAD THE PAYMENTS OUT lowering your payment significantly because of BOTH of those things. In addition rents often increase faster than expenses so over time the cash-flow improves on that end as well.

So, if BRRRR is where you prefer to be, I would look HARD at all possibilities before I give up on it.

This is definitely worth considering. Thank you for taking the time to answer this. I just don't know what I don't know. Even penciling out the numbers is risky for me because I don't know what all I should be accounting for. I have been using software (deal check) that fills in a lot of the unknown/common information for me and that's where I get the negative cashflow. I want to make sure I'm pricing things conservatively enough that I don't get hosed. But It's good to keep in mind that I might be able to find a way to make it work as a BRRRR and still have capital to start another rental.

Thanks again!