I did a successful flip, NOW WHAT?

Question

Hello guys, I am new here and I am very excited to have a community since I have never been in one.  A bit about myself, so you can understand my question. My wife and I live in LA, we have good jobs, we are in the highest TAX bracket. I wanted to use real estate to offset income, but instead I did a flip and I added more income to my household. I am not complaining, but is not what I am looking for. I need guidance on how to offset this income. All day, every day, I am looking for properties with positive cash flow and I can't find any. Yes, I am looking in other markets as well. I will appreciate some guidance from someone who already walked this path and can help me succeed at it.  THANK YOU. Can't wait to hear the strategies.

Jack Faysash · Answer

There's likely several expenses you can capture on your schedule C, such as a home office and mileage. I see a common misconception that you can just begin investing in real estate and have less taxable income. You can minimize taxable income on your real estate investments by depreciating the property over 27.5 years and capturing all your expenses. You can only offset you're other income if you have losses from your real estate investing, but this is more of a "backup" in my opinion incase you make bad investment decisions and lose money. But what investor plans to lose money?

Also, the IRS doesn't really view house flips as an investment, they view it as a business. They view the houses as inventory, and therefore profits get taxed in your income bracket rather than the capital gains rate. If you live in CA, you better hope bill AB1771 doesn't get passed, which will add a 25% tax on house flips.

Make sure you set aside federal income tax, self employment tax, and state income tax for your recent flip.

Cash is going to be king as interest rates are going up. If you're taking out loans for rental properties, cash flow is going to become much more difficult, but not impossible.

Nicholas L. · Answer

@Steven Gomez

Can you be more specific as to what you're asking?  If you're asking about how to use passive losses to offset active income, that's a question for a tax professional as others said

If you're asking for input on where / how to invest - great!

Kristina Kuba · Answer

@Steven Gomez

Have you considered using a 1031 exchange to buy a rental?  The nice thing about Tampa, is that you have two hold strategies, LTR or STR.  STR restrictions are extremely limited in City of Tampa limits.  Although home prices are softening, LTR rents are increasing in Tampa.  I personally have a multifamily property in Tampa proper and did two renewals this quarter and raised them both by $100 even after it was already market rent last year.  Good luck and reach out if you have any questions.

William Joel Idleman · Answer

Steven, first congrats on having the problem of making too much money!  Clearly moving into another property is the best option.  I've helped many clients lower tax liabilities through alternative tax favored strategies.  I'll send you a invitation to connect.

Chad McMahan · Answer

I often see here on BP, most people complaining about how difficult it is to cash flow. Meanwhile, my clients are getting huge returns in premium markets. Typically $600k-$700k PP + remodel is yielding $100k+ gross annual income. Part of getting strong returns, is knowing what to do with a property after COE, that can push the income envelope. If I can help, let me know.

Dave Foster · Answer

@Steven Gomez

@Kristina Kuba is right that 1031's are a great option if you're looking to go from one investment property to another, and defer all tax and depreciation recapture while you do it. Fix and flips do not qualify for 1031's because your intention was never to hold them for investment but rather fix them then turn around and sell it. If you decide to rent it out for a while.  That would qualify it for the 1031 exemption.

Bonnie Griffin Kaake · Answer

Steven, Keep in mind that with W2 wages, all your investments in real estate are most likely to be passive investments. There are some rare exceptions for STRs like Airbnbs and VRBOs where you are putting in about 50% of your time or more into "materially participating" in the property or more hours than anyone else and at least 100 yours. With W2 income, you are not likely to pass the IRS's stringent requirements for this RE Professional classification. The best things you can do is purchase properties and think in terms of long-term holds where your investment can likely increase in value over time. Then, be sure to do a cost segregation study on every property you purchase over a purchase price of about $250K. The benefit is that you get to take depreciation on all 5, 7 and 15-year property in the first year of ownership. This gives you passive losses that you can apply to your passive income from the rentals. It is all about the time value of money. A dollar in your hand today is worth more than that same dollar years from now. Why let the IRS hold that money and dribble it to you over 27.5 or 39 years when you could reinvest that extra cash flow now? For example, if you purchase a $1M building (excluding land value) you can usually expect about 6% to 8%/$60K to $80K in taxes you do not have to pay in year one. You can also roll any benefits you can't use in year one to future years. I know this can sound complex if you are not familiar with the benefits available to commercial property owners and owners of residential rentals. It is complex even for most CPAs/tax professionals, the vast majority sub this work out to companies who specialize in these IRS regs.

Alex Olson · Answer

Try the Midwest. Look at markets that have good cash flow and steady job growth. Happy to chat regarding KC. We can help introduce you to lenders and property managers here. I have written several articles on this topic for bigger pockets.

Steven Gomez · Answer

Thank you Kristina, Yes my options are open right now. Cool story about your property.

I did a successful flip, NOW WHAT?

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