Minimizing taxes paid on your Rehab/fliping business

[NA N.]

Could anyone please suggest best ways to minimizing the amount of taxes you pay for properties you buy, rehab and flip for profit in a short couple of months period?

One scenario would be I use my own cash to buy and rehab the property.

Second scenario I get an investor (family member) to lend me the cash for buying and rehabbing. Basically giving me a loan.

I'm hearing "Cash out", but not sure how this is applied. And doubt that any bank would lend me at this stage when I am starting out.

If you could please give easy examples on your suggestion is set up and what tax benefit is gained (tax avoided) from doing this I'd immensely appreciate it.

Let's say 80k to buy house, 20 to fix, and profit is 20k by selling at 120k.

[J Scott]

Originally posted by John Chapman:

J Scott This is probably a really stupid question, but doesn't the self-employment tax issue become a problem only if you are classified as a dealer?

As my CPA explains it to me, "dealer status" doesn't generally get applied by the IRS to a person -- instead, each property is classified as either inventory (business income) or investment (passive income). If you flip 5 properties and keep 5 properties as rentals in a given year, the 5 flipped properties will get taxed as business income (and be subjected to SET) and the 5 rentals will be classified as capital assets and will get taxed as such.

That said, I believe that if there are properties where the IRS can't really determine if they are intended to be flips or rentals (intent does matter in this case), then the IRS can look at previous patterns by the taxpayer and make a general classification of "Dealer" to determine that all properties fit that criteria.

But, if you segregate your properties properly (flips from one or more business entities and rentals from other business entities), you should be able to treat some properties as inventory (dealing) and some as rentals (capital assets).

I'm not a tax professional, but that's how I understand it.