Lessening Tax Liability On A Flip...
I am looking for feedback on the following scenario:
Buy a house for $100k by obtaining a rehab loan for $150k. Use the remaining $50k for rehab related expenses. Sell the house for $200k less than one year after buying it.
In this scenario the $200 sales price minus the $150 into the property leaves $50k. $50k x 38% tax bracket = $19k tax liability.
I know I can write off some related expenses like travel, and financing costs......But from minds sharper than mine, how can I reduce the taxes I will owe the IRS?
Thanks in advance for the always helpful responses, Brian.
You might try moving this one to the tax strategies forum.
Jeff
You will be able to write off everything as a business expense. This includes title work, realtor comissions, mortgage interest, property tax, utilities, insurance, travel cost, etc, etc.
The fact of the matter is that after that you'll still be stuck paying ordinary income rate tax. It sounds as though you are in the 38% tax bracket.
Frankly there is no way around paying this tax but you can avoid a decent deal of tax by putting the property into an s-corp.
I wrote an article on the subject here:
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=452
Frankly, no one ever went broke paying tax although it wise to set up a strategy.
I am not an accountant or attorney and my comments are as a layman only. You should certainly seek a competent accountant on these tax questions.
GOOD LUCK
If you don't need to cash out and think you'll be staying in the biz, you could consider a 1031 tax deferred exchange. In the end, paying taxes is paying taxes. The more you pay means the more you made, which is good. Try to hang on til the 1 year mark if you can.....Good luck
[addsig]
Stepping back a minute...
You are making a profit so you owe the tax. If you had a job and received a large bonus you would take the money, grumble about the tax and otherwise be very happy at the windfall.
Now, there are options.
1. Hold the place for a year. Put it on a lease/option so you know that it is most likely sold and you have little property management to worry about.
2. Just hold it as a rental after refinancing to pull out your cash (if you have any in). Building a portfolio this way is not a bad long term idea. Use a property manager so you do not get bogged down in the issues of property management. You can then move on to the next good deal.
3. As noted already, a 1031 exchange will work just fine. You need to be careful to make sure you follow the rules. Releasing cash is not automatic. It is a way to trade up but you are just moving the tax basis. Hence you can end up with a better property for a long term hold or one that you could sell immediately. In either case the tax status does not change from short term to long term just because of the 1031.
Bottom line is to consider yourself lucy that you did a good deal, made the financing work and have something to declare on your tax return if you do sell in the 1st year. Showing a profit does help with the lender in the future. If you hold for a year the government gives you a break. Having the capital tied up might mean you do fewer deals then if you sell and pay the tax. Hence you need to figure it out to see which way is best for you.
John
[addsig]
Many thanks for the replys....Brian