Avoiding Capital Gains?

1st house - rehabbed, sold, made $0
2nd house - rehabbed, wouldn’t sell, rented it out, $350/ cashflow
3rd house - rehabbed, sold, made $11,000

I thought I had finally figured it out - how to buy it right, found some good crews, good realtor, made a decent profit, etc…then I did my taxes this week.

I got killed on Capital Gains - I use Turbo tax - I haven’t filed yet in hopes that I am doing something wrong. Does anyone have suggestions on how to minimize the tax issue? Am I missing something? Would an LLC have helped? Any suggestions would be great - I would love to do another rehab, but am a bit gun-shy now. I know if I hold on to it for a couple of years and rent it out, that would eliminate the problem - but I really enjoy rehabbing and not landlording.

Any suggestions?



the tax issue!!

there are a couple of devious way to avoid,check around you will find
them. However more to the point if you insist on rehabing,DONT BUY
THE PROPERTY. by inn the name of a trust,dont change title, etc.then
you will only pay tax on your income,which by the way i think is more than cap/gain.
secondly buying and holding r.e is the ONLY way to make money,you
dont HAVE to talk to the tenants.

If you made no money on the first one there is no capital gaims tax. The second you are renting so only current income on the profit.

So why don’t you want to pay tax on the rehab.

Unless it become your primary source of income the self employment tax is not an issue. The LLC will have the same rates as individual if you only made 11K. If you pass it through on a K1 same effect.

Unless you need the funds to live on you need to learn how to put that rehab profit into a Roth IRA.

Thank you for your response. I would love to some day make this my primary source of income, so what I understand from you is that an LLC doesn’t make a difference unless I am doing quite a bit more volume/profit. I like the idea of the Roth IRA - I don’t need the funds to live on, but was hoping to continue to add to my “Real Estate fund” with each house I did. Can you buy RE within the IRA?

By the way, I put this transaction on form 4797 (Sale of Business Property). I started to put it in a Schedule C and use the whole “cost of goods sold” etc., but that seemed like the wrong thing to do.

Thanks again for your help!


I’d run it through Form 4797 on the theory that it was a “short term investment” (which is subject to ordinary income tax rates but not social security taxes) instead of on Schedule C (which is subject to ordinary income tax rates AND social security/self-employment taxes). This strategy is mildly agressive and only has a chance of working if you do not have a pattern of flips (you don’t, at least not yet).

An S-corp or LP can help lower SS/SE tax on subsequent transactions that would otherwise have to go on Schedule C (look for my “entities” article in the articles portionof this website for an explanation). A Roth can get around taxes altogether,though you have to be VERY careful as to how it’s run AND ensure that you are not running a trade/business through the Roth (Bud & I will likely disagree some on the latter point). In lieu of an IRA, the only way to reduce the income tax is to generate legitimate tax deductions. At some point, legitimate & rational deductions run out…that’s when you are making way more than you spend on rational business items.

John Hyre

Thanks for the professional advice…much appreciated. Read your article earlier and visited your website. We only own a fourplex/commercial bldg and a few SFR rentals, in addition to our residence.

ex-Buckeye Herb

Yes, you can buy property within your IRA. There are limitations, and it does not always make sense. The best thing to do is to search under “Self-Directed IRA” on the Internet and you will find a number of companies that administer these accounts. They usually have some really good educational material as well to help you get up to speed quickly.