Flipping Taxes
I am looking to flip properties and was wondering what is the best way to do this without paying a lot of taxes. I know that I can do a 1031 exchange but what if I want to cash out after 3 properties? can I refinance to maximum loan to value? would that be tax free?
Property flipping is called a dealer disposition. As such:You are not eligible to use a 1031 exchange
All your profit is taxable at your ordinary income tax rate in the year of sale -- even if you sell on the installment method
You may be subject to self-employment taxes as well
If you review all the discussions in this Forum, you will find quite a few topics that address this question in greater detail.
Then what is the best way to structure my future flips? I want to pay as little as possible in taxes.
The taxpayer must have the INTENT to hold their relinquished property and the replacement property for investment, income production (rental), or use in their business in order to qualify for 1031 exchange treatment. The intent to buy, fix-up and sell (flipping) will not qualify for 1031 exchange treatment and will be taxable as ordinary income.
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To pay as little in taxes as possible, sell for as little profit as possible. This is the only way I know to structure your flip transactions to minimize your tax bite.
Quote:
On 2003-08-04 21:04, DaveT wrote:
To pay as little in taxes as possible, sell for as little profit as possible. This is the only way I know to structure your flip transactions to minimize your tax bite.
So then I could buy a place, fix it up, refinance it and whatever is left over will be taxable.
Or here is another idea that I came up with. Is there a way to directly deposit the profit into a nonTaxable investment like bonds or something else.
So how do the big guys do it? I am sure that they have a way to do it with very little taxes.
Quote:So then I could buy a place, fix it up, refinance it and whatever is left over will be taxable.Not quite right. Buy a place, fix it up, sell it for a profit, then, whatever profit you realize is taxable. When calculating your taxable profit, the size of your mortgage balance is irrelevant. Your taxable profit is the difference between purchase price plus rehab costs, and, your net sale proceeds. Refinancing is a tax free event because the money must be repaid, but your mortgage balance is not even used in the calculation of your taxable profit.
Quote:Or here is another idea that I came up with. Is there a way to directly deposit the profit into a nonTaxable investment like bonds or something else. Yes, you are free to invest your AFTER-TAX funds into any investment vehicle you wish. I say AFTER-TAX because after you pay the taxes due on your flip profits, whatever is left over is after-tax money. Note that there is a restriction against deducting the interest paid on a loan when the money is used to purchase tax free investments.
Quote:So how do the big guys do it? I am sure that they have a way to do it with very little taxes.Maybe this is a question better asked in the rehabber forum.
Why not put your properties into an LLC or corp? or maybe even a land trust. if it was in a LLC then you wouldn't have "dealer status" and could be taxed on the gains for the year offset by expenses (which would include a board meeting to the bahamas
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StockPro,
The substance and character of the transaction determines the tax treatment.
If an LLC is used to flip property, the tax treatment is still the same; only now the LLC is engaged in dealer dispositions.
just flip enough so that you still make a sizable amount of $$$ even after you pay taxes, you're bound to pay them sooner or later....
Purchase business related necessities like a new company vehicle, needed equip., educational needs, entertainment costs etc.
Pension plans are available as well,up to 10K a year.
Keep one as a rental property and take advantage of the depreciation.
There are ways to reduce your taxable income and still take advantage of the fact you pay large in taxes.
Good Luck
Joe
I have been in financial investing for 18 years and I am new to real estate investing even though I am a loan officer. My experience has been in structuring my clients to earn as much as they can and keep as much as they can. I help to take the original investment which is outside a qualified plan and place it it a qualified plan for future investing. There is more to it and many great advantages. The most important thing to remember however is it must be done correctly and with every intent and action to do it within the legal system. Its not off shore. Benefits are great the set up is around $5,500. The yearly fees are around $1200.00 The taxes saved and the ablility to invest with tax deferred earnings are a real benefit. I can help here and I give thanks for finding TCI and the people here that are so very helpful. Please also remember true wealth (financially speaking) is not paying less taxes it is having more money. This does'nt mean though we can't take advantage of all that is there for us. A member of the Ways & Means Committee once said "it would take a genious to find a way to pay taxes and invest in real estate"
You also have to be careful if you open S corp or LLC and start flipping, and on a few you hold. You might still be classifed as a dealer. The best way is to have seperate entities for hold property, and flipped property. Then make sure you have ample write offs to conteract the tax events of selling the property. You should use a corp to do it. With flipping S corp is a better option.
What about setting up a self-directed IRA, so that any profit would go back into the IRA?
You wouldn't have to do all your deal this way, but it would shelter some money from taxes, and give you a nice retirement
Not always true. Flipping activity involves property held for resale to customers -- this property is treated as inventory, or stock-in-trade. Flipping activity is a business rather than an investment activity. If your IRA custodian will even permit flipping activity from within the IRA, you bring Unrelated Business Income Taxes into the picture.