My First Flip: Before & After

[Rachel Gill]

Although this took way longer than expected due to contractor issues, I'm proud of the way it turned out and happy to report that it is under contract after on 3 days on the market!  It's a 3BR, 2 full bath row home in Baltimore, MD and we added an additional BR in the basement.  (See before & after pics below)

Breakdown is as follows:

Purchase Price $54K

Rehab $50K ($8K over budget)

Holding costs $8K

Under Contract $140K

Approx Profit $12K

Due to holding longer than expected(almost 6 months) and unbudgeted rehab costs the profit is less than I had hoped, but still not too shabby for a first timer.  I had a lot of help along the way from my Hard Money Lender and a Mentor and learned a lot of hard lessons, but I'm so glad I jumped in feet first and accomplished this.  I'm now on the hunt for my second and hopefully third flip.  

[Will Barnard]

Originally posted by @Rachel Gill:

Originally posted by @Cynthia Matsumoto:

what has happened with the taxes - was a great big chunk taken - are you going to have to pay a capitol gains tax?

 Hi Cynthia, 

I will definitely have to pay income tax on the money because I'm currently set up as an LLC, which is considered a disregarded entity by the IRS, which means I will have to add my profit as income on my tax returns. I'm going to reinvest my profit in the business, but will definitely set aside some money for the taxes.

This question gets asked a ton on BP and while it is a great question, it is often stated wrong and even answered wrong. To be crystal clear, flipping a home resulting in a profit is not "capital gains" rather, the income is taxed as ordinary income. An LLC used to flip would result in the LLCS profit passing through to the managing member in a K1. That income would then be reported on the personal tax return as ordinary income.

You should always consult a knowledgeable CPA familiar with real estate transactions, however, an LLC is not typically the best entity for flipping. In most cases, an S Corp is better or an LLC with S Corp tax election.

Disclaimer: I am not a CPA and this info is not to be considered tax advice, just my personal experience.

On another note, great job and the turnaround, it does look great. I'm sure you learned quite a bit by jumping in and doing and to summarize, if using a GC, always run a check on their license number, always have a written contract, always have deadlines and draws determined, never pay ahead of the work completed, and time crunch or not, make sure the home is 100% ready for photos for listing, it makes a difference.