I have a question for all you seasoned investors who flip homes for a living.
I know if I resell my property within 12 months of purchase date, my property will be taxed as ordinary income.
How do you get around the income tax/capital gains due after the sale of your flip? I know you can deduct the cost of purchasing the property, repair costs, real estate taxes paid, cost of insurance, reselling costs, etc.
Are there any other way to avoid this taxation?
Thanks :-*
Angela
Yes, one other way: Don’t pay the taxes.
But, you’re probably NOT going to like the accompanying consequences.
Keep concise records, deduct all that you can legally, and pay the tax on the rest.
Keith
DISCLAIMER: This is not tax advice, nor is it good advice, it is just the other option! I pay my taxes…you should, too!
You need a real disclaimer. Try this one a client of mine (large corp law firm) uses:
Pursuant to U.S. Treasury Department Regulations, we must inform you that any tax advice contained in this communication, including any attachments and enclosures, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
And on the tax related question, can’t she do a 1031 exchange to avoid paying taxes?
no 1031 if you are a flipper. there is no time for holding per se in the tax code, but the generally accepted time is 12 months. Also the property must be used for investment or in a trade or business. If you are fullt-ime flipper, you will be classified as a “dealer” and the house will be considered inventory.
as for paying taxes, I read an article yesterday that 13 MILLION (!!!) people did not bother to file an income tax return last year. I didn’t realize the world was so full of Marion Barrys that “forget” or “don’t get around” to file tax returns…
I think the current term would be “Richard Hatch”, like he won $1 million on a national TV show Survior and forgot to declare it on his income tax. I think he’s looking at 10-12 years in prison, don’t think he got sentenced yet though.
Depending on the size of the gain, it may make more sense to hold for a year and then do the 1031. It takes a few months to find a buyer anyway so a year really isn’t that long.
In the end its just cheaper to pay taxes rather than to avoid them. What’s 10-12 yrs of your life worth?
I know I will have to pay taxes on any gains, I am not trying to avoid paying taxes, just finding more loop holes. I just think its a big chunk of the profit. 
I will have to keep very good records and use all the deductions that I can apply. My goal was to build capital by flipping and then use that capital to buy and hold some real estate for the long term. Thanks for all your input…
Let me be real honest with you. No one on this board is going to help you with this or give you advice. I am not sure exactly why this is but IMO it is either because they have no experience themselves or they don’t want to give up good information for free. I believe that most people are not doing enough deals to truly worry about asset protection and IMO this absolutely includes figuring out how to pay less taxes. Anyone can argue with me if they like but at the end of the day, they will be paying capital gains at their personal income tax rate while I will not be.
I have asked this question in the past with answers like “speak with your CPA” or “Just pay the taxes”. BS, this is the number one thing that the ultra-rich are concerned with considering you can give up to 40% of your income or profits to the government each year.
I personally know someone who made millions and he was only personally liable for income of 50k! (He probably wouldn’t be happy for me even mentioning this but it needs to be said) I will say this, from what I could understand it is accomplished through the use of LLC’s and trusts and I don’t understand completely as it is very complex. The specifics of how this is done is held extremely close between people that are making millions of dollars, their attorneys, and their CPA’s. They don’t want anybody knowing how this is done because then everyone would be doing it and the IRS would make changes to the tax code to prevent this from happening in the future.
The only luck you are going to have is by asking very specific questions perhaps on the tax and asset protection forum.
As far as the advice that has been given to me but somewhat hard for a poor newbie and is this, get a good CPA. I will take it a step further, make sure that they are super agressive and know real estate very well and are ready to do exactly what you want them to do. No this doesn’t mean anything illegal.
I will be the first to admit I have not done any deals but I am starting. I purchased the home I live in, I am closing on my first rehab today, and will be selling both by April 1st. So take it for what it is worth.
WHAT’S YOUR MAJOR MALFUNCTION, SEAN??
He asked a question and got the legal answer. You are taxed on the profit of a flip as ordinary income and cannot do a 1031 exchange.
I said, “Keep concise records, deduct all that you can legally, and pay the tax on the rest.” It’s actually just about that simple.
If you don’t want to pay taxes, don’t make an income.
Get a good CPA is good advice - always.
As far as your constant bad-mouthing of the advice given here, I am going to recommend that you if you don’t like the answers that you take your act elsewhere…I can even assist you in that endeavor if you wish - just say the word. But for me, I’ve had enough of it. Stop with it now. There are people here that spend significant amounts of their time trying to help others, especially the newbies…
I don’t think you’re a newbie, I think that you’re a wannabe and you want all of the answers just handed to you. Did you need us to come over and do your taxes for you? Oh wait a minute, you haven’t done a deal, so there are no real estate investment taxes!
Keith
Are you insane?
In her initial post she said “I know if I resell my property within 12 months of purchase date, my property will be taxed as ordinary income.”
and you said “Keep concise records, deduct all that you can legally, and pay the tax on the rest.” Wow, thanks I am sure that she didn’t know that, come on man where is the advice in that?
I never turned this into a personal attack as you did and I never have. If you read any of my posts I have never done so.
When did I ever badmouth the advice given on this board? Did you even read the entire post before you flew off the handle and started foaming at the mouth?
I simply made an observation that I have seen on this board since I have been here no big deal. Don’t your comments go without saying?
Never done a deal? I’m 24 and own two pieces of property I wouldn’t consider that nothing. Also this is a FORUM, I have the right to express my opinion in any way that I feel necessary as long as it stays within the rules of this site. I believe that I have done so. Just relax and don’t take yourself so seriously.
One last thing:
“I am going to recommend that you if you don’t like the answers that you take your act elsewhere…I can even assist you in that endeavor if you wish - just say the word. But for me, I’ve had enough of it.”
What does that even mean?
WORD lol :-X
<<[b]In her initial post she said “I know if I resell my property within 12 months of purchase date, my property will be taxed as ordinary income.”
and you said “Keep concise records, deduct all that you can legally, and pay the tax on the rest.” Wow, thanks I am sure that she didn’t know that, come on man where is the advice in that?[/b]>>
What did you want me to do lie and say:
(1) No, don’t worry it’s not taxable at all,
(2) Just report it as capital gains at the lower rate,
(3) Use a 1031 tax deferred exchange and hide the evidence,
(4) Or the correct advice, which was given.
<<When did I ever badmouth the advice given on this board? Did you even read the entire post before you flew off the handle and started foaming at the mouth? >>
As a matter of fact, yes I did read the entire post…please decipher for me, “Let me be real honest with you. No one on this board is going to help you with this or give you advice. I am not sure exactly why this is but IMO it is either because they have no experience themselves or they don’t want to give up good information for free. I believe that most people are not doing enough deals to truly worry about asset protection and IMO this absolutely includes figuring out how to pay less taxes. Anyone can argue with me if they like but at the end of the day, they will be paying capital gains at their personal income tax rate while I will not be.”…looks like a slam on the posters here to me. Tell me how I should interpret this differently.
<<Never done a deal? I’m 24 and own two pieces of property I wouldn’t consider that nothing. >>
Again, intepret YOUR OWN words, “I will be the first to admit I have not done any deals but I am starting.” Gee, “haven’t done any deals” sounds like what I said “haven’t done a deal”…again tell me how your own words are supposed to be interpreted. You either lied then or you’re lying now…which is it?
<<Also this is a FORUM, I have the right to express my opinion in any way that I feel necessary as long as it stays within the rules of this site.>>
As do I and I did…I think I’m “spot on” with my assessment.
Here are some of your other posts just to refresh your memory:
“Really, no kidding! What are you talking about it is only worth wholesale? I would get more calls if I priced it at 18? I could get rid of it in five minutes if I priced it at 10k and gave away a hooker with it, is that properly priced? What is your point here. It is only worth wholesale to a dealer perhaps. I never asked you for your opinion on the price, I know what I need to get out of it and what I owe. Anyway do you know what I paid for it or what it was worth after I drove away?”
“On a car take over payments that is insane. I’m not doing it because I can’t afford it I have plenty of money I just don’t want it on my credit report and want to decrease my cash outflow for debt to income purposes.”
“Surely you have a relevant example of what we are talking about in all of the deals you have done?”
Here’s “the book” on you…you ask a question. If you don’t like the answer or if it’s not what you’re looking for the poster is “insane”. Then you rant about some sort of conspiracy threory designed to keep newbie real estate investors in their place and use it to make themselves millionaires.
Get real. Grow up. We didn’t write the tax code, we just live with it. I don’t like taxes anymore than anyone else but at least that I know if I’m paying taxes, I’m making an income. If you can’t pay the taxes, don’t do the deal and if you can’t stand the answer, don’t ask the question.
…and as far as “I am going to recommend that you if you don’t like the answers that you take your act elsewhere…” it means just what it says. If you feel as though the answers here aren’t measuring up, I recommend you go in search of a forum where they do…maybe:
www.taxevadersunite.com
www.sell_and_pay_no_taxes.com
www.I_Sleep_in_a_10X10_Cell_with_Bubba.com
Keith
there seems to be what I would deem an urban legend surrounding “loopholes in the taxes” with respect to REI and “secret technqiues” to pay no taxes only available to a special club of rich people. This is the talk of late night info-merial hosts and Internet hustlers.
For the most part, if you make money will you pay taxes (the only exception really being the 121 rule for primary residence); granted there are legel means within the tax code to DEFER those taxes indefinately (e.g. 1031 exchange, installment sales) or LOWER the tax rate (long term cap gain rates). Yes, there are some complex technqiues involving corporations to adjust the cost basis or again defer taxes, but for the most part, these concepts not really make sense for the average RE investor based upon their cost and complexity. I’ve heard my share of folks claiming to pay no tax; usually this just means they did not finsih their sentense to include the words “this year”, but they will someday (or use the only know escape technique: death).
If you don’t like to pay taxes there is an alternative: don’t make any money. Its 100% guarenteed to work everytime; I’ll even sell you my special kit to teach you the process for $999.99 (a lazy boy recliner, a TV and a couple of cases of Bud).
Happy Investing to all!
Ahhhh, the secret loopholes! You don’t understand these closely held secrets, but you BELIEVE…so it must be so. Sean, it’s not all about shortcuts and secrets.
I am a seasoned investor, and I flip homes, but I wouldn’t say that I do it for a living. More of a sideline for me.
I am currently researching self-directed Roth IRA’s and a new product, Solo 401k which I think can also be a Roth vehicle.
It appears to me that if your self-directed Roth IRA or 401k can do a deal then you will be untaxed on the profits, forever. I don’t need flipping income to pay my bills, so I would much rather put $50000 into a retirement account than pay $25000 in taxes and put $25000 in my bank account.
Steve,
Your right about the self-directed Roth IRA. It’s a great vehicle for the REI. Now the problem is finding the right person who can execute it. Most CPA’S and accountants don’t even know what your asking them about with this topic.
I work as a tax preparer and you would not believe the misinformation that is out there that people think is IRS code. More times than not they will argue with me whem I show them the real info in the IRS publications.
AAAHHHH Yes, the SECRET LOOPHOLES!!! I used one today. It was called the EIC, EARNED INCOME CREDIT… The woman thought she was going to get back about $900, she picked up a check tonight for $3800. That’s what I get paid for. Does it smack of shady, don’t think so. Is it fair?? You tell me… It’s the tax code and that is what it is there for. We have to prepare a return according to the rules of the IRS, and we do it!!!
Well we talked with an accountant yesterday and we (my husband and I) decided to structure our business as a dealer, because that is actually what we will be doing is fixing and flipping. In the end, it is earned income and that is one of the costs of doing business. Ultimately the best for us would be to shelter income via an IRA. I really enjoyed reading all the replies and I want to thank those who did reply because I did find it very interesting and informing!
angela
Steve,
can you tell me what you mean by this?
I believe you can use an IRA and invest in real estate. SO can you sell your real estate and put it into an IRA?
thornhillhomes,
I replied to Steve but also want to ask you the same question. Can real estate be sold and put into an IRA?
Also, How should one go about finding the right person who can execute it?
Thank you much
i wanted to sell an investment property last year and not pay 25% income tax on it[15% fed and 9.8% california]
I asked around several CPAs & tax attorneys until I found someone who said it could be done.
I deeded it to my C-Corp and the C corp sold it, recognizing the profits.
I then had about 10 months before I had to pay taxes on that instead of just 4. I used that money to fund a corporate pension plan and pay other investment expenses and also make other investments.
get a good tax planner/cpa.
Diane,
The money which you put into an IRA can come from anywhere. But the amounts you can put in are limited.
You can’t sell YOUR real estate and have the gain shifted into an IRA in order to defer or avoid taxes. But you can do a deal within a self-directed IRA, using the assets of that IRA, and keep the gains within the IRA thus avoiding or deferring taxation. These gains are unlimited.
You probably already knew all this. I didn’t convey my thoughts clearly in my previous post.