How Do I Avoid S/t Cap-gain Taxes On Pre-foreclosure?
I happened to fall into an opportunity to pick up a pre-foreclosure for about 1/2 FMV. current owner wants out from this property completely; I want to fix and flip in a month or so.
Now that I have a deal to do, I'm not exactly sure how to carry it out correctly.
It seems to me that if I have her sign a quit-claim, it becomes mine and then if I sell in a month, don't I have a short-term capital gain to be taxed?
She spoke with a "we buy ugly houses" person, who said that if they took over the property, fixed it up and sold it (which is what I want to do), then they wouldn't have s/t capital gains taxes to pay. I'd love to know why they don't and how they avoid the taxes on the sale.
Can I have her sign a quit-claim and then not record it 'til I sell to someone else? If I do that, then how do I prove I have the legal right to sell the property?
Any help/ideas are appreciated.
TIA.
Gary :-? [ Edited by glieberman on Date 04/21/2004 ]
First, do not delay recording your deed. That makes you vunerable to her selling her property to more than one person.
The "Ugly Houses People" may be acting as brokers & aren't taking title to the property & just flipping it to an investor. No taxable gain but their commission is taxable.
Or they may be utilizing a 1031 exchange & rolling the proceeds into another property.
The only other scenario that I can think of is if they purchase it with money from a tax deferred enviroment (401k or IRA funds) Those gains are in a tax deferred or tax free environment.
If it is a really good deal, don't feel too bad about paying taxes. The 1st rule is to make money not avoid taxes. You can pay 0 taxes if you don't do any deals.
Good Luck
How are you going to stop the foreclosure? Are you bringing the loan current and taking it subject to.
Brenda
The current owner thinks it's pre-foreclosure. The reality is: it's months away from the foreclosure.
In a nutshell, she has run out of money (she runs out comletely at the end of this month) and needs to sell to get out from under the mortgage payments. She needs enough to move and re-settle in another city where she is paying on another condo. She has accepted my offer to buy her $50K equity for $10K. The unit needs about $5K in rehab.
While the topic of a 1031 exchange has come up, is there a minimum holding period before I could exchange this property for another?
As one person before said: So many questions; so little time!
Gary[ Edited by glieberman on Date 04/22/2004 ]
Quote:She spoke with a "we buy ugly houses" person, who said that if they took over the property, fixed it up and sold it (which is what I want to do), then they wouldn't have s/t capital gains taxes to pay. I'd love to know why they don't and how they avoid the taxes on the sale.glieberman,
In this situation, the property is called dealer realty. For tax purposes, it is the same as inventory to a retail store. When you sell inventory, your profits are ordinary income and taxed at your ordinary income tax rate. Additionally, in your transaction, your net profit may also be subject to self-employment income taxes.
There are no short term capital gains involved, but since the short term capital gains tax rate is the same as the individual ordinary income tax rate, the question is only academic.
In the future, it would be better to bring your tax questions directly to the Tax Strategies Forum.
Do not worry about paying the tax! You only get taxed on your profits so you still come out ahead.
This transaction will not qualify for a 1031 exchange.
If you purchase the property in an s-coproration you will not be subject to self employment taxes like you would be with an LLC or purchasing in your own name. You need to pay yourself as an employee or set up a management company to filter some of the profits through. I could talk for a year about this---however step 1 is make money
You definatly need to record the deed. I would also try to get a WARRANTY DEED.
GOOD LUCK