How Can I Delay Paying Taxes On A Flip?

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Hi, I just signed on my first investment property. I want to rehab and then take my earnings and invest in one or more properties to fix and flip. My husband and I are in a high income tax bracket so I really want to avoid paying for as long as possible. I have been told that you must wait a year and a day to do a 1031 and I have also been told that that is not neccessary. If I take out a owner occupied financing vs investor finance how does that affect doing a 1031.
Are thier other ways to protect assets, what about holding properties in LLCs or whatever. Take it slow because I am very green and thanks for any help I really need it!

Comments(2)

  • NewKidinTown225th January, 2005

    Your investment strategy is to fix and flip properties. Flipping is an active income business, with profits taxed as ordinary income. A 1031 exchange is not available to you regardless of your holding period.

    Applying for an owner occupied loan when you have no intention of residing in the property is loan fraud, punishable by a maximum fine of $250K and/or up to 2 years in a federal prison.

    Protecting assets is a legal issue, not a tax issue. The business entity that is right for you is determined by your investment strategy, your potential liability exposure, and your estate planning needs. Consult your tax advisor, your CPA, and your estate planner before making an entity structuring decision.

  • NewKidinTown226th January, 2005

    HBgaucho,

    You have received quite a few suggestions, some correct information and some misleading.

    Consult a professional tax advisor if you need to, but at least visit the IRS web site and download the IRS Publications related to Rental Property income and expenses.

    Generally, rental property expenses start on the day you place the property in service as a rental. You are not entitled to any rental expense deductions prior to that. Depreciation also starts when the property is placed in service as a rental, not sooner. The first year depreciation is prorated from the month you put the property in service to the end of the tax year. There is only one way to depreciate residential rental property -- the straight line method over 27.5 years.

    A professional tax advisor will help you allocate your expenses between personal use and investment property use.

    Since you had originally intended to occupy this property as your primary residence, but decided to convert it to a rental, I can appreciate that you may want to sell this property an acquire another property to use as your primary residence. A 1031 exchange is not available for this purpose, though you are allowed to convert a property that has been in service as a rental into your primary residence. Your tax advisor can go over the rules and the tax impacts for this also.

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