I’m looking for some advice from some of you more experienced investors/flippers. I have a small multi-unit that i purchased 10 months ago. I paid 48K with 8K down and 40K carried over 3 yrs. I put about 5k into rehab and held it as a rental for 10 months now. I recieved a cash offer 75K and owe 32K on the mortgage. I really want to cash out on this to reinvest on some other property i have been negotiating. But the main question is TAX?? How hard is it going to hit me? This will be my first flip… i buy real estate as an investment for rental equity. But i know the Irs will most likely tax this as a flip. Does it make a difference if i wait a couple months and have held the property as rental for one year? Is it feasible to come up with misc deductions from gas/rehab/vacancies/taxes/utilities/etc to show i only made about 10k profit instead of 30K? From my reading on this site on previous post i have realized taxes on a flip can hit you as hard as 50%… if i am losing 10 or 15K of my profit to uncle Sam… i dont feel it would be in my best interest to flip. I’d make more money in the long run holding it as a rental. Any input welcome… Thanks, Sean.
Do a 1031 exchange and defer the tax.
No, the IRS won’t tax this as a flip. You bought the property and put it in service as a rental. When you sell the property, the sale profit will be taxed as a capital gain.
Is it feasible to come up with misc deductions from gas/rehab/vacancies/taxes/utilities/etc to show i only made about 10k profit instead of 30K?
Feasible, yes. Legal, no. If you have legitimate rental expenses, claim them on your Schedule E. In addition to depreciation, anything you pay out of pocket and can prove was spent on your rental property activity is a legitimate deductible expense. Anything you fabricate and claim as a deduction is tax fraud.
Vacancies are not expenses. They don’t cost you anything out of pocket. Lost rent from a vacancy is not deductible. Rehab costs are not deductions either. Rehab costs are recovered through depreciation over 27.5 years.
If you bought the property 10 months ago, then you should have reported 2007 income and expenses on your Schedule E when you filed your 2007 tax return. By the time you expense your mortgage interest, taxes, insurance, utilities that you paid for, repairs, preventive maintenance, advertising, legal fees, leasing costs, and take a depreciation expense, I wonder if you really had a taxable rental income. I suspect you probably had a rental loss for the year.
From my reading on this site on previous post i have realized taxes on a flip can hit you as hard as 50%... if i am losing 10 or 15K of my profit to uncle Sam... i dont feel it would be in my best interest to flip. I'd make more money in the long run holding it as a rental. Any input welcome.
If you sell before you have owned the property for one year and a day, you will pay short term capital gains taxes on your sale profit. The tax rate will be your marginal tax bracket rate plus whatever state income taxes you may have to pay. If your federal marginal tax bracket rate is 25%, then that is your short term capital gains tax rate.
Wait a couple more months to sell, so that you have more than one year of ownership, and your maximum capital gains tax rate on your federal tax return will be 15%. You will also have to add your state income taxes to your total tax liability.
Regardless of your holding period, depreciation you took (or should have taken) is taxed at 25%.
If you hold the property at least two years before you sell it, the property becomes eligible to participate in a 1031 exchange. A 1031 exchange allows you to roll over the equity in your investment property into a new investment property and defer the capital gains taxes until you sell the replacement property.
Consult your CPA for specific details.