First Flip Listed! Any strategies to avoid CAPITAL GAIN$?

Question

Dave Foster · Answer

@Michael Hayworth, Nope there's no "intent box".  Nor is there a statutory holding period.  Intent is what will be judged in an audit.  And holding period is only one facet of demonstrating intent.  There's plenty of room for unique situations. But, to make a blanket statement on length of hold is fraught with peril in light of years of case law that demonstrates different.

Michael Hayworth · Answer

Oh my god, there's some really wrong advice on this thread.

@Doug Watts, please consult your CPA. But I've worked through this extensively with mine (I've bought and sold businesses as well as real estate, so tax minimization has been pretty important to me). Here's my understanding. If your CPA tells you differently, shoot me a message back - I'd like to know that and discuss it with mine in that event.

There's no "intent" box to check on your tax forms. It doesn't matter what your intent was when you bought it - it matters how long you held it.

If you sell a property in less than a year, it's regular income, taxed at your regular tax bracket. Mine's 44% (39.6% plus a 4% Obamacare Supplemental Tax on, so that's a bigass bite for me.  If you're in a lower tax bracket, capital gains matter less.

If you hold it a year, then sell it, you're at long-term capital gains, 24% (20% plus that same lovely Obamacare Supplemental Tax), regardless of your regular income tax bracket. So if I expect to make significant gains on a property, I'll usually put a renter in there for 6 months to a year, so it closes after the 1 year deadline. I have three houses in that situation right now.

But if you're in a lower tax bracket, like I was when I started out, the difference matters much less. So it may not make a big difference to you to hold it for more than a year until you get into the upper tax brackets.

I've analyzed 1031 exchanges a couple of times and didn't like the way they tied up my money and tied my hands on various things. I set an internal guideline of I'd need to be at $80K profit or more on a flip to make it worth doing a 1031 Exchange, and that's pretty rare in my market. You may look at things differently when you analyze them.

Good luck!

Account Closed · Answer

I think it's considered regular income, not Capitol Gain, if you bought it with the intention of flipping it, regardless of how long you've owned it. Definitely seek professional advice.

Sylvia B. · Answer

First of all, those 3 people should have a written agreement stating the terms of their partnership - who pays for what, what the responsibilities of each are, and how the profits will be split.

Secondly, whether or not it is worth it can only be determined by those involved.

Thirdly, everyone involved should consult a tax professional for advice.

Brandi Carballo · Answer

I thought I knew the answer to this, but reading through all the conflicting responses made me wonder if I was right or wrong. So...in doing some research I found a great article on the subject...right here on BP, or course.

https://www.biggerpockets.com/renewsblog/2014/07/1...

What tax bracket you fall into depends entirely on your annual income. You can find that info here:

http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New

Sylvia B. · Answer

That depends on what your taxable income is for the year. It ranges from 10% to 39.6%. However, don't forget to add the 15.3% self employment tax.

Here is a website that may help - http://taxfoundation.org/article/2016-tax-brackets

Dave Foster · Answer

@Doug Watts, There is no statutory holding period to be eligible for a 1031 exchange.  However you're intent must have been to hold the property for productive use.  Your description of it as a flip indicates that you purchased it with the primary intent of reselling not holding.  So it would not be eligible for 1031 treatment and the property would be treated as inventory subject to ordinary income tax regardless of holding period.

If you're concerned about taxes you're much better off to hold it and put a rentor in for a year and refinance it to get your next property.  Then after a year or so sell it and then do a 1031.  You'll save almost 30% in taxes, have the money to get your next property, and rental income.

Jon Holdman · Answer

There are no capital gains tax on fix and flips.  The net profit is ordinary income.  Taxed at your marginal tax rate plus self employment tax.

Length of time you hold a property is less important than intent.  If your intent is to buy and hold, capital gains comes into play even if you sell relatively quickly.  OTOH, if your intent is to buy and sell, holding a few years doesn't change that.  Its still ordinary income.

Bhekizwe M. · Answer

Keeping the flip as a rental seem the best if possible.the refinance to release funds for other projects

Carolyn Morales · Answer

well I am about to see my CPA about it. 1/3 will be equity transferred from an estate to a minor in a probate inheritance. So it gets complicated. Me and my sister are investng with our little brother who is a minor. We have no part in inheritance but can buy it from the adults who do and i have custody of my little brother who is a beneficiary. Him and my 2 step sisters are beneficiaries. And me and my real sister want to buy them out, then improve the home but my little brothers equity will transfer with our improvement til he is 18 and it will be a value add type of rehab in many ways.

First Flip Listed! Any strategies to avoid CAPITAL GAIN$?

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