Total income and Capital Gains Taxes when flipping?

Rehabbing, Fix and Flip, Rental Properties
1

I am getting a bit discouraged with the idea of flipping. Maybe my math is off or the people constantly screaming that it’s not smart with the economy is wearing me thin…

But… if I follow the 70% rule on a rehab property and get a HML to fund it, what would be my true income on a 100K arv home if I were to buy, fix and have it sold in 3-4 months? Looks like my tax bracket currently is 28%.

If I’m all in at 70K then sale for 100K, Im looking at 30K remaining. 10K will pay closing and realtor. Of the 20K left I am sure I will have a few thousand for holding and utilities. Heaven hope I keep on budget and get my asking price.

If I only come out with 10K after holding, utilities etc, then uncle sam takes 3K, what is the benefit to flipping? 7K is not a big income for 3-4 months… I read about the tax exchange 1031. Is this the way around it?

I am not trying to get rich quick. My wife and I are doing fine in our careers, but I plan to transition to REI full time some day…

Thanks for any guidance!

2

You are also forgetting the 13% for selfemployment tax.
You will be paying both parts of social security and medicare on the proceeds.

This is why I buy, fix and rent vs flip.

As I understand it, you have to hold it a year before it can be used for a 1031 exchange. (I have never done one.)

3

Dang, you’re right… Well at nearly 40% taxation, I am really discouraged. I am not a fan of being a land lord…

May be back to the drawing board for me…

Thanks.

4

Assuming you purchased the property as a long term investment rather than for flipping ( to clarify intent I make sure those words are in my Agreement of Sale), rent for a year before selling and you pay only the 15% capitol gains tax.

5

Thanks jdm.

I duuno if land lording for a year for each property is worth 10% to me. Im currently in a 25% tax bracket.

Maybe I just get my feet wet and see how it goes! :slight_smile:

6

Hi,

3 or 4 months??? Really???

I only look for and tie up (Contract) properties my buyers list are looking for, if I have a owner occupied buyer looking for a house, I contract it and either close it with transactional funding or with an assignment depending on the numbers, price, buyers cash position, etc, etc, etc.

My longest closing period is 45 to 60 days, my shortest all cash investor (me) to investor could be as little as 2 or 3 work days!
Paying taxes is part of doing business. Doing business must be more than $10k in income in 3 or 4 months!

If you bought and sold 2 deals per month of $10k each that’s a $240k per year income or $145k take home per year!
That is pretty damn good income!

If you are a fix and flipper it is 30% average investor discount construction rehab costs some carrying cost’s and closing cost’s so purchase price on a $100k FMV / ARV home could be $45k purchase initially and typically you should walk away after all cost’s of rehab and carrying cost’s with about 15% in profit average!

But any way you cut it if your buying a $100k home for $70k and putting $10k in repairs and another $5k in carrying cost’s and overhead and you pay 8.5% to sell it and close, your only making about $7k. This is the wrong way to do this as the 30% is meant to give some room to except an offer (Within 5% or so) and to pay selling and closing cost’s and still turn out about $15k per hundred thousand!

Your construction, rehab, remodel, carrying cost’s, utilities, overhead, expenses, and original purchase closing cost’s are of 30% investor standard discount! To buy a house for 70% it needs to be pristine, in move in condition and updated within the last 5 to 10 years so it is presentable on todays standards!

Anything less than pristine is 30% discount rehab cost’s!!!

                GR
7

Thanks again for the help GR!

Yes, I meant all in for 70% and we have an 88 day average turn around here in San Antonio. One thought would be to invest in pricier homes… Yeah taxes would take more but I would make more too! I am not too discouraged anymore. I am still actively looking for my first flip! :slight_smile:

8

Hi,

Are you wholesaling (Flipping)? Or Fix & Flipping (Rehabbing)?

Fix and flipping your time holding is in relation to rehab and marketing time, we average 120 to 135 days here in the wild west, however we have been doing a bunch of properties every year!

           GR
9

Yes, I was planning to fix and flip.

10

Its possible your deals do not have enough profit potential for short term fix and flip. You also might want to look at reducing your costs, particularly realtor and closing costs. I generally completely eliminate the realor costs by selling myself and try to move as much of the closing costs to the buyer as possible. My closing costs are generally limited to prorated taxes and utilities.

In my market, the only thing that is currently selling is “perfect” properties; so why buy “half-distressed” properties at 65% ARV and still need to practically gut them to put them into competitive selling condition when you can buy the truly distressed properties at 45% ARV and wind up putting in maybe a little more effort and money but having a much bigger possible margin.

11

I understand where you are at. You just need to keep looking.

My first property that I bought as a flip I decided to keep and rent, but it will be sold as soon as the tenant gives me notice. I’m in no hurry. My numbers were pretty similar to yours.

FYI, the realtor originally told me that I needed to list at 99,500, but one just up the street just sold and closed at 131,500. I want it to sell fast, but the extra 20k of profit I now think I can get (list at 119,500) really excites me. I’m in it for $70,000.

My personal residence I just bought at 125k, and will be in at 140k all fixed up. It’s worth about 170k - 180k after repairs. There really wasn’t a lot more margin there versus my rental I bought in March, but it’s a great place for me to live in. I’m not sure if more expensive properties really have higher margins, not around here anyway.

12

I understand the need to be “all in” at 65-70% including purchase and rehab and assoc. costs… I will try to work deals to include as much of the holding costs and what not as well.

I will tread lightly in the first rehab/flip and see how it goes. I am sure it will be a rush and I will be addicted from then on…

Guess we all pay taxes and die, huh?! :banghead

13

On a good note… My CPA did tell me I would avoid self employment tax while still working my J.O.B. for the time being! LOL

So IRS will just get 25% for now…