Fix and Flip tax documents?

Question

Hey guys when you fix and flip a house and make a profit what documents do you need handy when filing your tax return.?

Account Closed · Answer

Why do fix & flips? It's the riskiest and most taxed side of real estate investing. According to the National Association of Realtors (NAR) the average flip makes $65k gross profit (before subtracting rehab costs, holding costs, etc) ,but only $15k net profit, (that's what you put to your pocket for all your risk and effort)  and takes 6 months from purchase to selling. If you can find a property that substantially beats those odds it might be worth it.

The most important thing about a flip, IMHO, is to figure out comps before you begin and use conservative numbers. Don't over improve for the neighborhood. Know your market. Plan on things taking 3 months to sell. Be looking for the next one about half way through getting the first one done. It takes time to find the next right property to flip.

Or, you can simply "cash flow" properties. It's less work, more profitable, far less risky and you get all of the benefits the tax system allows. Plus, you can do "quick cash" as they arise.

Stanley Bronstein · Answer

@Steve Vaughan That's why I said "most likely" (grin) ...

Steve Vaughan · Answer

True that. However, when bitten by SE taxes, ordinary income and earning enough interest that it takes away normal tax credits like child tax credits for those of us with kids at home- the intelligent investor pivots to more tax-friendly activities.

Paying more taxes does not necessarily mean one is earning more money or advancing financially.  Classifications of said earnings play a huge role.

I have to earn 1.5x in ordinary income, 2-4 or even 8x in interest income to net the same dollar of passive income after taxes.

Stanley Bronstein · Answer

@Steve Vaughan Here's the ancient CPA's curse. May you pay more income tax next year than you did this year. The reasoning for that is that if you pay more next year, it most likely means you made more. Just factor the tax into the equation when evaluating a fix and flip.

Lance Lvovsky · Answer

@Lauro Torres Yes you do. A good CPA can explain everything required and get all your books and records in order.

Steve Vaughan · Answer

Yep. Re-invest it, take a cruise, buy a car.  It's all realized as ordinary income.  The only thing worse in my experience is earning interest.   Earning interest takes child tax credits away if above about $1500 per year.

Lauro Torres · Answer

@Steve Vaughan Haha thanks man.  What if I used the profit to purchase another home and rehab that property? Still considered ordinary income?

@Lance Lvovsky Thanks.   Financial statements? such as Sellers settlement statements? Man I do need a CPA help me collect and structure everything don't I?

Lance Lvovsky · Answer

@Lauro Torres

Financial statements but if you don’t have them then all HUDs, bank statements, credit card statements. I don’t look at receipts but it is your responsibility to keep them in your records.

Steve Vaughan · Answer

For starters your settlement statements from the buy and from the sale.

All rehab receipts.

Checkbook to write a big check to uncle sam for earning ordinary income instead of long-term cap gains ;)