How to minimize tax on flip gain

Question

John Thedford · Answer

Flips are inventory and taxed as regular income. You can write off all related expenses. You cannot 1031 a flip under most circumstances. Rehab rent out  and then 1031 out after you have demonstrated it is a rental and not a flip.

Dave Foster · Answer

@Greg Parker, I don't know that I would call it a "rental I couldn't rent" necessarily.  The issue is that your intent must be to hold for productive use in trade business or investment.  There is no statutory holding period.  Nor is there a specific requirement to generate rental income.  Most folks feel comfortable with a holding period of more than a year but there could always be a situation where circumstances warranted a shorter holding period.

It is conceivable that you purchase a property with the intent to hold for productive use but found out it would be a "rental you couldn't rent".  If so and you felt you could document that a 1031 would be appropriate.

The issue is that you need to be able to demonstrate that intent if ever questioned.  And of course that happening once is a fortunate accident.  If it happens several times a year it starts to look just a little contrived.

Greg Parker · Answer

@Dave Foster So, I could say I had to invest more money into the property than anticipated(which I did), therefore it would not produce sufficient cash flow, so I need to sell it and move on??  And, I must have been misinformed about the 1 year holding period.  This is good news.  Thanks!

Greg Parker · Answer

According to what I have read on 1031, you need to keep the property 1 year and also call it a rental you couldn't rent.  Then you can roll it.  I have the same situation going on with a flip.  I am looking at the numbers and trying to decide if I should hold it for 6 extra months to avoid (not evade) taxation.

Basit Siddiqi · Answer

@John GroverCongrats on the 6 figure pay day!

Flipping is ordinary income and subject to self-employment taxes. It is not subject to capital gains tax.

You are entitled to all the ordinary and necessary expenses required to generate the income. Example of typical expenses include traveling to job site, interest on loans, repairs, utilities etc.Please note that some of the above expenses are added to basis of inventory and gain is reduced upon sale.You may want to look into creating an S-corp there is potential self-employment tax saving strategies involved with an S-Corp.Have you looked into a retirement account. You may be able to put a good chunk of the gain into retirement reducing your tax liability.

You can also look into treating it as a rental property.

Justin Marshall · Answer

1031 exchange would be your best method to defer any taxes however you limited time to re invest said profits (180 days).  With that being said all of the profits have to go towards the new property as to avoid taxation.  As far as the life insurance I have looked into it and it could be viable for you personally but you said this "income/gain" will be in an llc so I'm not sure how you could put it into a personal account without paying yourself.

How to minimize tax on flip gain

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