Capital Gains Tax after Fix N Flip or Partner with Owner

[Tim Ivory]

Hi. My parents need to sell there home and I was planning on fix and flipping it for them since I've already been researching all about this investing option and know more about the logistics involved than they do. They owe 189K in equity with an ARV of around 280K. After putting together a Scope of Work, It seems it needs about 50K in repair work, leaving about 35K in profit after 5 percent in selling costs (using no realtors).

I'll be the project manager of the fix and flip, budgeting, planning, and hiring the contractors, as well as financing the rehab part of the loan. Originally, I had intended to simply have them transfer the deed to me subject to the existing financing or simply buy the house from them for what is owed on the house using a short term hard money loan, but the more i think about it, the more it might not be a good idea for any deed transfer. They owned the house for around 10 years, so am I correct in thinking they won't pay an capital gains tax if they sold it themselves? Whereas, if I take the deed before starting the fix and flip, I would be subject to this tax (and possibly self employment tax too) since I'd have the deed for a few months? If this is the case, wouldn't it be better to just partner with my parents so no deed transfers at all and we split the profit?

I like this idea, but I'm not sure a hard money lender would approve a loan application without me taking title? I'd be hard pressed enough to fine one willing to do a rehab only loan. 

How would you guys handle this situation? Should I be added to the deed, or would I still be subject to capital gains since I haven't owned it for 2 years? If the lenders requires my partner or I to have deed, should I have them cosign the loan (I really don't like this idea).

[Jason D.]

@Tim Ivory the best scenario would be have your parents keep the house, fix and sell it, and take the profit. Your parents will be exempt from capital gains, you would pay short term capital gains if you took title and resold.

Now, about the "deal"....

A hard money lender probably wont fund the project because it is owner occupied. The loan would most certainly have to be in their name as well.

You would need to get an unsecured loan, such as a personal loan or line of credit. If you have great credit and income, not a problem, but if not, that could be a hurdle.

It may be easier for them to do some fixes themselves and you find a deal outside the family. But if you can make it work, it could be good practice and less risk if something goes wrong.