Hi -
Well, one answer is… until you die. But that’s probably not the answer you were looking for.
If you buy and sell as a biz, you are a dealer. And while taking profits whenever and however you can get them isn’t all that bad, there is this depressing bit about federal income taxes. They are due when you sell a property (and sometimes under other circumstances, but that’s another story). When the IRS considers you a dealer, you can no longer use section 1031 of the tax code (exchanges) and you normally won’t be able to use installment sales as a way to defer the tax either. In other words, if you were to “carry the paper” on one of your properties and you only managed to get a small downpayment, you could (and probably will) have to come out of your pocket and pay the income tax. This sometimes comes as a surprise to people who should know better.
If you purchase properties with the idea of holding them long-term, then you are considered to be an investor. You can now do those things the dealers can’t – namely 1031 exchanging and installment sales. You also can benefit from the current low rates on capital gains. Simply put, you pay less tax (normally) on something you’ve held long-term (hence, the name – long-term capital gain) versus something you purchased last month and sold yesterday (ever hear of “flips”?)
Now, if you’re getting confused at this point, I sympathize. But you should also understand that current income tax rates are very low (at least, historically speaking). And while you may not like Uncle Sugar taking some of your hard earned profits, the fact is that he isn’t taking nearly as much as he once did. Stay tuned, this could always change.
In the meantime, if you buy it and sell it relatively quickly, you will pay tax at ordinary income rates. That’s OK, you still made a profit.
If you hold it “long-term” (by the IRS definition), you will only have to pay tax at the lower captial gains rate. This is good.
On the other hand, if you plan to stay in this game for a while, then you will want to look into that exchange thing (1031). Here you pay no income tax today (maybe some way down the road, maybe not). This is definitely better.
And of course, you could hold the property until you die. At that point, your heirs will get a “stepped up” basis in the property which allows them to sell the property without paying income tax (usually). There is the matter of estate taxes and local (State) taxes, but overall, this is not a bad plan. Unfortunately, you do have to commit yourself fully (die) to take proper advantage of it.
So, I guess when you look at it from that standpoint, maybe paying a little income tax isn’t all that bad.
Take care,
Eric C
PS – there are those who are both investor and dealer. They do this by separating their properties (and often the ownership of them) into those they wish to hold long-term and those they don’t.