Advice On Capital Gains Question
I am buying a single family house for a good price and looking to rehab and sell for about a $40k profit. Is it true that If I sell it as a residential house for someone's primary residence that I won't get hit with capital Gains? I was going to Rent it out for a year and do a 1031 exchange but A local Investor just informed me I would only get taxed for Ordinary Income and no capital gains. Is this true, or is he full of #$%! ?
Does anyone know ?
<Disclosure>I am not a CPA... just experianced taxpayer. If the SFH was not your primary.. than it is subject to short term capital gain, if you hold it less than a year. If you rent it out and then sell it after a year you will be taxed at the long term Cap Gain rate. Or thirdly, if you 1031 the property you are deferring the cap gain tax towards the new asset, just prolonging the ineviatable.
Quote:Is it true that If I sell it as a residential house for someone's primary residence that I won't get hit with capital Gains?Yes, this is true. Under the rehab-and-flip scenario you describe, your sale is a dealer activity. All your profit is taxed as ordinary income (no capital gains treatment here) AND your profit is also subject to self-employment income taxes.
I suspect, however, that if this is the only time you are doing this, and you don't plan to make rehab-flipping a business, then you can argue that the deal was done for investment purposes, and take short term capital gain tax treatment without concern for self-employment income taxes. Do the rehab-flip again, your investment tax treatment argument is considerably weakened.
By the way, the short term capital gain tax rate and your ordinary income tax rate are the same.
Quote:I was going to Rent it out for a year and do a 1031 exchange but A local Investor just informed me I would only get taxed for Ordinary Income and no capital gains. Is this true, or is he full of #$%! ? Depends upon the context of the conversation. It's hard to tell from the way you asked the question. If the investor was trying to tell you that your profit would be taxed as ordinary income as a flipped property, then the investor is correct.
If the investor was trying to tell you that a flip property is not eligible to participate in a 1031 exchange, then the investor is correct.
If the investor was commenting on the tax treatment of your rental income during the time you hold the property as an investment rental, then the investor is correct -- rental income is ordinary income taxed at your ordinary income tax rate. The investor is also correct that you would not have any immediate capital gains recognition as a result of a properly structured 1031 exchange.
Sounds like that investor may have been around the block a few times and you might learn from him.[ Edited by NewKidinTown on Date 06/20/2004 ]