What's the best way to tax shelter $250K in flip profits?

Question

In 2019, I'll fix & flip 3 properties with a total of $250K+ of profit. I just set up a Self Directed IRA but it only has $24K in it.

Can I invest just $24K from the IRA and then dump all $250K of profits back into the IRA as sheltered profits? I can't seem to locate a rule on the amount of profit the IRA can receive compared to the investment.

Any other ideas of good ways to shelter the profit from fix & flips? I'm only holding each property for 4-6 months so no 1031 option.

Thanks to all for ANY advice!

Michael Plaks · Answer

@Cass Lowrie You're fundamentally misled by the gurus and podcasts. Tax strategies that you've heard about, such as 1031 exchanges, apply to capital gains. Those happen with rentals, not flips. When you're flipping, you don't have capital gains and you do not have depreciation, installment sales, 1031 exchanges etc. It does NOT matter how long you hold a property if it's a flip. You could, in theory, use $24k to buy a property within your SDIRA, but you will have 3 problems making it a bad idea: your IRA will need to get a loan for the project, which is not easy, and it creates a special heavy tax on the IRA (UDFI)your IRA will be engaged in an "unrelated business" creating another bad tax on the IRA (UBIT)you're not allowed to personally manage this project (prohibited transaction) You can, as @Eamonn McElroy suggested, partially mitigate your taxes by running your business as an S-corporation or a C-corporation and by channelling some of your profits into a retirement plan such as a 401k, but only partially. Hoping to avoid taxes on flipping is a pipe dream. A very common one, but a dream nevertheless.

Ryan M. · Answer

@Cass LowrieI think you need talk to someone if your wife is using her SDIRA to invest in your business. That is a prohibited transaction.

Mike B. · Answer

@Cass Lowrie speak with a knowledgeable CPA about Opportunity Zone Funds! I’m considering that now for a rental property I have. Limited window.. best deal out of it is to put money into an OZF in 2019. There are restrictions etc but read up on it and if you think you qualify speak with a CPA.

Michael Plaks · Answer

<Face palm> You do not buy rentals to offset taxes. You buy rentals to get cash flow and build long-term wealth thru appreciation. Buying rentals for tax benefits is like opening a restaurant to feed yourself.Opportunity zones are to deal with capital gains. Just like depreciation, installment sales, 1031 exchanges and other strategies. Once again: as a flipper, you do NOT have capital gains, so NONE of that is helping you. You're digging in the wrong field.

Carl Fischer · Answer

@cass @Cass LowrieYou are correct -add some rentals, hold for a year and It makes them Long term capital gains Cutting taxes in half. Look for tax credit investments and depreciation. Do what you need to “live on” personally -then add the other real estate to IRAs, ESAs, HSAs and 401ks. just think about it, brainstorm with a cpa or tax planner or tax attorney—it will become clear.

Russell Brazil · Answer

Opportunity zones allow you to defer gains. As a flipper you do not have gains, you have earned income.

Michael Plaks · Answer

I'm not familiar with direct sale trust. If you meant deferred sale trust - that mechanism is used for deferring capital gains. Flippers do not have capital gains, so they cannot use it.

Eamonn McElroy · Answer

@Cass Lowrie Ask your CPA if an S Corp makes sense to mitigate self-employment tax. I also like Solo 401(k)s more than SDIRAs, but you should be able to reduce income tax with either (but not SE taxes). Ask your CPA if a Solo 401(k) is better for you than an SDIRA. "Can I invest just $24K from the IRA and then dump all $250K of profits back into the IRA as sheltered profits?" No you cannot. And I don't believe you'll be able to invest money from your SDIRA into an active business that you manage. You are a disqualified person with respect to the SDIRA.

Brant Richardson · Answer

$250k profit your first year. Doesn't sound like you "have a lot to learn". Outstanding."In 2019, I'll fix & flip 3 properties". That sounds like at least one is not sold yet. It doesn't sound like you need the money so why not hold one as a rental then sell it later with capital gains rules instead of earned income rules, as others suggested.

Brian Boyd · Answer

Look for Opportunity Zone investments. There are plenty of them out there and you will enjoy the tax incentives associated with them in the long run.