Newbie Capital Gains Fear

[Brian Smith]

Hello everyone,

This past January I purchased a property to flip. After three months of renovations the property is set to hit the market on April 1st. Most of the work I have completed myself. The total renovation cost so far totals around 15k. The ARV is 320k, purchase price was 160k. Im looking at around 160k return. Now, the part that isnt exciting is the tax liablity that comes along with that. I ran the numbers last night and it seems that I will need to pay 60k in capital gains tax.

I'm exploring ideas to avoid paying the tax.

Would keeping the property as a rental and cash out refi. be a better option?

Any other suggestions?

Thank you in advance!

 

[Evan Polaski]

@Brian Smith, I would look beyond just the taxes.  Without diving into too many scenarios, ultimately, it comes down to reinvestment opportunities.  Simple math: if you sell for $320k and have two more of effectively the same flip available the next day, I would say you are better eating the taxes to effectively double your money again in 3 more months.  

A couple notes on holding: yes being owner occupant for 2 years can save on capital gains, but assuming you have a roughly $2k monthly PITI commitment, that is $48k of outflow. And if your market doesn't see much appreciation, you are nearly netting out the same thing.

Holding and renting is an option, but depends on what the market rents are for your property and your monthly outflow.  Also, tenants are notoriously hard on properties.  So assuming you will have an additional major paint touch up and deep cleaning between each tenant.  In my experience, it costs about $1500-2000 each turnover.

So back to my point, you need to weigh a lot of options here, beyond just "i don't want to pay $60k in taxes".