I have browsed and read most posts on this subject but would like to clarify and make this as simple as possible. I aman investor, I bought my first pre-foreclosure for 140000. Market price for this home is around 180000. Assuming I profit 30000, I will have to pay approximately 11500 in capital gains tax here in Oregon. Basically, the only thing an LLC would do for me is to protect me in a lawsuit,it will not help with the tax burden at all since most LLC’s are “pass through”. So, how do investors actually use their profits from deals as income during the year. Do they just accept the 38 percent capital gains tax and try to do enough deals to make it worth it? My goal was to someday quit my day job, but with these taxes it makes it difficult when I am giving roughly 40 percent of profit to Uncle Sam. Thanks. Jason. I forgot to mention that I don’t want to hold property, so the 2 year exemption will not apply.
the rule 121 regarding a 2 years holding only applies for principle residences. If you hold it for a modest amount of time (1 yr or so) and have other income source, a 1031 exchange is an excellent way to build your RE empire while deferring your tax liability.
If you want to do quick flips and/or make htis your sole income souce then 1031 is an avenue that is open to you. Just pay the tax man and move on.
I suspect aak5454 just “misspoke”. He really meant to say that if you do quick flips then 1031 is CLOSED to you. Quick flip property is dealer realty. Not only is the profit from dealer realty taxed at your ordinary income tax rate, but the net income is also self-employment income subject to payroll taxes at 15.3% – all before your state takes its cut of your profit.
Consult your own tax professional for specific details.
Thanks Dave T; I forgot the word “not” (i.e. is NOT an avenue open to you)
Thanks for responding. So, how do investors use their flipped houses as sole income? I know you said just pay the tax man and move on but how many investors actually do this sucessfully?
Let’s say your flip profit is $30K on a single property. The ordinary income tax at 25% plus payroll taxes at 15.3% plus state income tax at 7% takes $14190 out of your profit. Even though the tax bite may seem high, you still have the larger portion of your profit in your pocket after taxes.
How do successful flippers make a living at this? Volume.
Even if you only get $15810 after taxes on a $30K flip profit, what do you have if you do the same thing 5 times during the year? How about 10 times, or one a month?
That’s why I don’t flip houses. A house is an asset, and rather than sell it right away, why not make your asset work for you for as long as you can? You have good numbers here. You can make a lot more than $30,000 and spread your profits over several years.
Thanks again for responding. I am starting to agree that keeping houses for a period of time might be better than flipping. The main reason I am flipping this one is because I have a 100 percent-non-owner occupied mortgage on it. Therefore, it is at a higher interest rate so the payment is pretty large and I don’t want negative cash flow just to keep it. Anyway, thanks for the advice.
It’s very difficult to create a positive cash flow renting out just the use and occupancy of a home.
You CAN make a positive cash flow if you trade or sell your tenant such benefits as mortgage interest writeoff, property tax writeoff, a percentage of future appreciation, etc. for HIGHER RENTS. I use a land trust and a triple net lease to get a positive cash flow and related benefits.