I have been flipping for a few years. I have been keeping the houses for a year and day to help with my taxes. I do 90 % of the work myself. Next year I would like to flip a few houses in a year and sub out more of the work.
Is there any way to cut down on my taxes? I would prefer to keep more of the money!
Thanks,
Michael
Congratulations!
Having a tax problem is good. It means you are making a profit.
The best thing you can do for this is seek out good professional advice. A good CPA who is familiar with this type of business is invaluable. Provided that you find a competent one, they are not an expense if they save you more than their fees.
That said, you are already getting capital gains treatment according to your posting. This is good if you can manage to do it since the tax rate in capital gains is less than the tax rate on ordinary income, as you know.
Are you incorporated yet? A regular C corporation might let you take more tax deductions for items that you do not take as an individual. Also, you can maximize the benefits that you are allowed to take under the law that are a tax expense for the corporation, but that might not be taxed as income to you as an individual. These are commonly called fringe benefits. Your tax professional can help you structure this.
Make sure you get your tax advice from a tax advisor who is throroughly familiar with the tax treatment for dealer dispositions.
When you say that you have been flipping for a few years, it raises a red flag for me. By default, property flipping is an active income business and all your income is ordinary income to the business. Capital gains tax treatment does not apply, regardless of how long you have held the property.
Perhaps you misstated your business model, but if not, you need a professional tax advisor on your team now.
Great point, Dave T!
I shouldn’t have assumed that Michael was doing everything right taxwise. I was wondering about this after I posted above, but it didn’t register until later. I’m glad you caught it.
Also, I mentioned a C corporation in my post, but an S-corp would probably be better starting out, don’t you think?
By the way, how many flips can you do in a year before the IRS would say that what you are doing is dealer activity? I’ve heard various answers about this with no real consensus.
The Internal Revenue Code defines a dealer disposition as “any disposition of real property held primarily for sale to customers.”
The word “any” in this definition says that the magic number you are looking for is ONE.
Yes, the code is clear on this.
I talked to the Austin office of the IRS about this subject a couple of years ago, and the person I spoke with seemed to indicate that they usually disregard three of four sales in a year, but any higher number would make you “a dealer.” I didn’t get a letter ruling on this, just a verbal explanation over the telephone. I’m sure this carries no weight in the event of an audit. It’s just interesting.
I suppose that if you held a portfolio or rental houses and you also sold the tenant an option to purchase the property, then the IRS could make the case that you had “real property held primarily for sale to customers.” This might be particularly true if you did a large number of these, or if you had a significant percentage of your options exercised.
If you sold any of these properties, couldn’t they rule that the sale was a dealer disposition?
And if they did this, wouldn’t this cause you to loose all the benefits of investment treatment on your entire portfolio of properties, like depreciation, Section 1031 deferral, capital gains, etc.?
Valgolas,
Don’t get too paranoid about this. My long term rental property is held for the production of income. My intent behind the property acquisition was to hold long term for rental use, perhaps hold indefinitely.
Just selling one of my rental properties to my tenant, does not change my original intent to that of a dealer to real estate.
It is the intent behind the real estate acquisitioh that is the key determinant. Acquire with the primary intent to resell, even if you delay the sale with a lease option, you are a dealer to real estate.