I have a question about capital gains made from rehab property. I currently am in the process of puchasing a rehab for $95k - Comps are at a $145-155k, I plan on walking away with no less than $25k and with this profit I will roll it back into another investment property.
Will I have to pay taxes on my gain?________I thought that by rolling the profits back into realestate that I would be exempt from any gains tax.
the answer is 1031 tax-deferred exchange. Basically, you sell your property, use a 3rd party (called an accomadator) to hold then funds/proceeds and then purchase another. There are variations on this theme, but just selling and then buying another does not qualify as a 1031 exchange (so named due to the section of the tax code that addresses this situation).
this topic has been extensive discussed on this board and many others. spend some time readin around and check back if you have specific questions
Okay…Say I bought the property for $95k and spent $20k to rehab it, will I beable to recover my $20k investment free from tax.
Ex: Paid $95k +$20k(rehab cost) = $115k / sell for $145k >profit above sale price $50k minus $20 for rehab = $30k in actual profit ???
<<Say I bought the property for $95k and spent $20k to rehab it, will I beable to recover my $20k investment free from tax.>>
Yes, as long as all of the money invested went to “capital improvements”…this will allow you to change the cost basis from $95K to $115K…you cannot use the cost of your own labor.
See IRS Publication 550, chapter 4:
http://www.irs.gov/publications/p550/index.html
Keith
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new_rei_guy,
The previous responses overlooked your basic business activity. You are acquiring, rehabbing, then flipping the property for profit.
You are engaged in an active income business and the flip property you are selling is the inventory (merchandise) your business is selling. Merchandise is not investment or business use property, and therefore, is not eligible to participate in a 1031 exchange.
Furthermore, all the sale profit from your business activity is ordinary income to your business and may be subject to payroll taxes as well. Capital gains tax treatment does not apply.
All of your sale profit is taxable income in the year of the sale, even if you carry back financing to facilitate the sale. You can not use a 1031 exchange to defer taxes, nor can you take a depreciation expense for the property during your holding period.
You are free to use your after tax proceeds any way you wish, but reinvesting into more rehab flip property does not defer taxes on your profits.
Consult a licensed tax professional for specific details.
I realize that the 1031 is not going to work for me here.
I am buying this property using conventional financing and as a primary residence, My main concern is that the monies I invest to rehab the property will be recaptured without a tax hit.
You never said anything before about the subject property as a primary residence. This changes the entire posture of your tax treatment, provided you alter your strategy a little.
Purchase the property and take up to two years to complete rehab, all the while occupying the property as your primary residence. Sell after two years of ownership and occupancy as your primary residence and ALL of your sale profit is tax free under Section 121 of the tax code.
There is no requirement to reinvest your sale profits into another primary residence, but why not continue to do so? Your rehab adds value – forces appreciation – and you reap the reward with tax free sale profits after two years.
Even if you sell before you become eligible for the capital gains exclusion on the sale of your primary residence, all of your direct cost for rehab is an adjustment to basis, recovered (tax free) when you sell the property. Your taxable sale profit is a capital gain, and 1031 exchange is still not available to your primary residence.
Thanks… that directly answered my question.