Flip/LTR Hybrid? Tax incentives?

Question

I know the Pros and Cons of both Fix and Flip and LTR. I was wondering if anyone has dabbled or knows anything about a hybrid option. I know on flips it is considered traditional income due to being classified as a dealer (someone who buys for the profit of the sale) and not an investor (someone who buys for the profit from rental or other forms of income) but what if you bought and renovated a property and held it for one or two 12-month leases? Wouldn't this property now qualify for the 1031 program and defer your income taxes? If so why are there not more flippers doing this?

Jake Baker · Answer

@Bryan H.

We do 15-20 flips/brrrrs per year in Jacksonville FL. We try to keep as many brrrrs as possible. This is a great strategy to sell a rental that we own for more than a year instead of flipping a new property. The timing doesn't always work, but we strive to use this "hybrid" approach.

Michael Plaks · Answer

You cannot survive in real estate with a skin this thin. Nobody attacked you. If you re-read every single response here, including mine, all we gave you is helpful advice.

Well, and maybe some friendly teasing, with an emphasis on "friendly." Next time, just respond with "ok, boomer" and we will be even. ;)  All the best on your real estate journey.

Michael Plaks · Answer

@Bryan H.

Geez, our society really made the young people believe that everything is a hybrid of some sorts. :)This is not a hybrid, it is a rental property that you rehabbed prior to placing in service. Yes, it would qualify for a 1031 exchange.

Why more people are not doing it? Because it's contrary to the flipping goal of quickly raising cash and running to the next one. Because most flipping is done with expensive hard or private money and getting long-term financing is difficult and does not always make sense economically, today especially. Because people do not want to deal with tenants. Because tenants can destroy your newly rehabbed property. There're more reasons, I'm sure.

David M. · Answer

@Bryan H. don't take it too personally.  Some of us just see this over and over, and its tough to stay possible. Poke around the boards.  There was a recent thread about a "long flip" or something.  Its "sombody's" strategy/book.  You might want to research / follow along if you think this strategy works for you.

Just remember, real estate investing isn't all roses.  Lots of people lose money, but you just don't hear about it.  As with just about everything, there is a sampling bias.  We've actually been getting a bunch of threads about losses in the past few months for some reason.

Good luck.

David M. · Answer

@Bryan H. No, its nothing new.  You are just doing lots of little "long term" investments.  If the IRS wanted to audit you, I think it might be hard to say that you weren't flipping, however.  Also, you've put it up on a public forum...

Sure, call it a "hybird" or whatever you want.  I'm not a marketing specialist.

To your last question, its because usually your funding is tied up, many times flippers use hard money loans which are expensive and don't allow for occupation, not their speciality.  Some flippers only flip because they don't want to be a landlord.  Also, you are no longer selling a brand new property, its now used, again...  Also, the past ~7yrs has seen unprecented increases in rents and values.  It wasn't always this way...  So, what happens when the music stops?

Lastly, just because the flip profits are more heavily taxed doesn't mean its "bad."  With "potentially" wider profit margins, one can net more, and more frequently, with a flip than with a long term rental.  So, in the end one can wind up with more net income.    Part of "what you keep vs what you make" includes what is your best way to make money.  Otherwise, if you wanted to pay no tax, just don't make any money...

Good luck.

Bryan H. · Answer

Thanks @Jake Baker I knew someone would have this idea before me. I agree the timing is not always ideal but I try to buy where I can rent STR, LTR, flip and last resort live in. I try to buy where I don't feel a lot of market shift so I can get consistent returns and worst comes to worst I planned it where I can rent and have cash flow of 400-600 per month. My primary also fits these specifications so if I ever made such a bad deal and couldn't afford to get out of it I would rent my primary and live in it until I figured out a new game plan.

Bryan H. · Answer

@Michael Plaks When I say hybrid I was referring to the fact that yes I rented it out but the real reason was for the sale of the house. When I buy a property to hold I look more at cashflow than I do ARV compared to this situation where I am more focused on the resale value and less on the cash flow.

Bryan H. · Answer

I appreciate everyone's replies. It seems like some of you don't like my question or my wording and I'm sorry you feel that way. I am asking a question because I don't know the answer and I am trying to educate myself on the topic. I don't have a problem posting this in a public forum because I won't do anything that may get me into trouble down the line hence me having a conversation with other investors. I think if I have asked this question others may have the same question and hope I helped them get an answer too.

Sean O'Keefe · Answer

@Bryan H. The IRS classifies flip investors as Real Estate Dealers buy and hold investors as Real Estate Investors.

Two of the top criteria for an investor to be considered a Real Estate Dealer is 1.) "Intent" at the time of purchase 2.) "Frequency"

Real Estate Investors generally want to avoid being classified as Real Estate Dealer because the gains from sale are taxed as ordinary income and you don't qualify for 1031 exchange.

Using hybrid to describe real estate? That's dope!

Flip/LTR Hybrid? Tax incentives?

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