Tax Treatment On Rehabs

Comments(10)

• 
  DaveT25th July, 2003

  The quick answer is that you are engaged in a rehab and flip business As such: All of your profit on each sale is ordinary income, taxed at your marginal tax rate, unless you are using a C-Corporation to conduct your business.
  All of the profit from each sale is taxed in the year of sale, even if you sold with seller financing.
  Your income is also subject to self-employment taxes, depending upon the business entity you use for your activity.
  Your flip property may not be used in a 1031 exchange, neither as the relinquished property, nor as the replacement property.
  Your holding period does not matter, since your property is considered stock in trade. So capital gains tax rates do not apply.
  For specific details, consult your professional tax advisor.[ Edited by DaveT on Date 07/26/2003 ]

• 
  investorB26th July, 2003

  Thank you, those are some good basics.
  
  So would the income and expenses go on a Schedule C, and file an SE as well?
  
  Would income from the property sold in March be offset by expenses of the current property if I don't sell it this year?
  
  Is the house itself treated as "inventory?"
  
  Is there a better/best way to structure my "business" for tax (or other) purposes?
  
  Thank you again.
  Brian

• 
  DaveT26th July, 2003

  Brian,
  
  Depends upon the expenses and your business entity.
  
  Generally speaking, rehab expenses are not deductions but additions to your cost basis. Your deductible expenses are your company overhead -- office supplies, as just one example -- and are deducted in the year the expense was paid.
  
  Consult your professional tax advisor and your CPA for specific details.

• 
  webuyproperties26th July, 2003

  [quote]
  On 2003-07-25 23:58, DaveT wrote:
  
  [*] Your holding period does not matter, since your property is considered stock in trade. So capital gains tax rates do not apply.[/list]
  For specific details, consult your professional tax advisor.
  
  Is this because of the new law that went into effect in May?
  
  thanks for your response
  Dereknull

• 
  DaveT26th July, 2003

  Derek,
  
  The tax cut that became effective on May 6 of this year did not change the tax treatment of dealer dispositions.
  
  Dealer realty is considered "inventory", or stock in trade. As such, income from the sale of inventory (a dealer disposition) is ordinary income, not investment income. That is why it does not matter if the property is held more or less than one year-- the tax rate is the same regardless of the holding period.

• 
  Stockpro9926th July, 2003

  I would suggest getting Bronchicks course on how to protect your assets or set up a bulletproof corporation.
  
  Randall
  [addsig]

• 
  jmarquie28th July, 2003

  I am dealing with this same question and depending upon your specific situation, this may not be considered inventory property. Do you have other income? How many will you close this year? According to my accountant, if you only flip a couple properties each year and have other income from a full time job or business, you would owe short term cap gains not subject to Self Employment Tax. ST gains would be taxed as normal income.

• 
  pmatheson128th July, 2003

  Do you have to flip? Why not hold and rent? Talk to tax advisor on 'Reasonable Time' for Long Term Capitol Gains. You can get a large portion of your equity out via Refi or hard Money lender if you need your capital to continue.

• 
  investorB28th July, 2003

  So does anyone know a good tax accountant within 30-40 minutes of Minneapolis?...

• 
  DaveT29th July, 2003

  Quote:According to my accountant, if you only flip a couple properties each year and have other income from a full time job or business, you would owe short term cap gains not subject to Self Employment Tax. ST gains would be taxed as normal income.jmarquie,
  
  Ask your accountant to review the tax code, Section 453(l)(1)(B), which defines a dealer disposition as: Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer's trade or business.
  
  I would submit that the use of the word "Any" suggests that even ONE flip transaction is a dealer disposition.