Capital Gains, Tax Tips

[Pat McCandless]

Hello BP,

I'm looking for some references in Connecticut, ideally in Central CT/Hartford County area, that can advise me on the tax implications for flipping properties, what to expect and maybe some strategies to prepare myself for tax season.  I'm currently waiting to close on my first investment property, a fix and flip, so I just want to get ahead of the game.  Preferably someone who has a lot of experience working with investors/entrepreneurs.

Thanks in advance!

[Ed Matson]

Hi Pat,  I think @Rick Santasiere makes a lot of sense. I am a RE investor with long term buy and hold MF and has just completed his first flip, a very major rehab.  (What an education).  You really do need a good CPA, but to answer your initial question in the most broad terms:

Income from flipping, whether it takes less or more than one year is generally "regular income" and not tax advantaged.  Its sort of like the IRS considers flipping a job, rather than a RE investment.

Income from buy and hold properties can be tax advantaged, as you can take depreciation, a paper expense, and recognize the gain at time of sale as capital gains, not regular income.

1031 exchanges are very complex.  The costs and complexity to administer them are generally applicable to the sale and purchase of long term buy and hold properties. Also, the way I understand them (have gone through one) a 1031 exchange would preclude you from using your flip profit as income, which is generally the point of flipping.

One of the best books that summarizes real estate taxes (and a host of other issues) is The Wall Street Journal's Guide