Related:<\/em><\/strong> 6 Essential Considerations When Looking at Real Estate Statistics & Data<\/a><\/em><\/p>\n What I found most significant was that home-flipping return on investment (ROI) has hit its second lowest point since 2011. The lowest point was in the first quarter of this year. Housing costs are up and the inventory of distressed properties continues to shrink, with foreclosures down 6 percent year over year<\/a>.<\/p>\n Of those, “zombie properties<\/a>” (abandoned pre-foreclosure properties) now account for less than 3 percent of the country\u2019s inventory.<\/p>\n The report by ATTOM Data Solutions is compiled from sales deed data. It calculates the difference between the purchase price and sales price of single family homes and condos bought and sold in less than 12 months (gross ROI).<\/p>\n The report indicates their analysis of sales deed data found ROI slightly over 40 percent. However, the data available only includes purchase and sale prices. For the purposes of this report, ROI (their \u201caverage gross flipping profit\u201d) is the difference between the purchase price and the flipped price.<\/p>\n This report does not factor in rehab costs and other expenses incurred. According to flipping veterans, they estimate such costs typically run between 20 to 33 percent of the property\u2019s after repair value (ARV). This means that net returns for veteran flippers were actually significantly lower than the stated 40 percent.<\/p>\n If you don\u2019t have time to read ATTOM\u2019s report, here are some other important highlights:<\/p>\n Related:<\/em><\/strong> How Data Analysis Can Make You Rich in Real Estate Investments<\/a><\/em><\/p>\n With a shrinking inventory of distressed properties, if you are an investor with a home-flipping business model, it would be wise to adjust now. While the acquisition and rehab costs are escalating, a change in strategy and timing can significantly reduce the taxes you pay on this activity<\/a>.<\/p>\n In his ultimate guide to flipping<\/a>, Brandon Turner acknowledged that, \u201c[Flipping profits] are not all yours to keep. Instead, any profit you make needs to be shared with the government when tax time comes. House flipping is generally considered \u2018active\u2019 income and therefore taxed at the highest levels.\u201d<\/em><\/p><\/blockquote>\n Flipping is taxed at the highest rates, corresponding to ordinary income tax brackets. This can be reduced to the capital gains tax rate while still allowing you to benefit from the upside potential of distressed properties. Keep reading below for more about this and a list of other potential options you can use.<\/p>\n As you likely know, capital gains are the profits from the sale of an asset (like a home or property). Such profits are considered taxable income.<\/p>\n When you sell your property in less than a year, you are subject to capital gains tax (short-term capital gain) that is based on ordinary income tax brackets, which can be quite high. However, if you hold onto your property for at least one year and one day, you will pay a much lower capital gains tax rate (long-term capital gain)\u2014as long as you can also demonstrate that it was your intent to hold the property for productive investment use (similar to a 1031 exchange).<\/p>\n Some quick facts about capital gains tax:<\/strong><\/p>\n Living in the home you\u2019re flipping can arguably be difficult. Usually, there is a lot of construction going on, and it can be tough to keep things organized. Mindy Jensen\u2019s article<\/a> addresses exactly that.<\/p>\n But Mindy and many other investors\u2014myself included\u2014have figured out that this a great way to avoid paying taxes on their flips through the Taxpayer Relief Act passed in 1997. All you have to do is own the home and live there (it must be your primary residence) for two of the five years preceding the sale.<\/p>\n If you can live in your property for two years while you\u2019re flipping it, you can then write off up to $500,000 in capital gains ($250,000 for single folks).<\/p>\n Brandon Turner first coined the term BRRRR<\/a> some years back, and it\u2019s been popular ever since. If you\u2019re unfamiliar, the BRRRR method describes the process of Buy, Rehab, Rent, Refinance, and Repeat.<\/p>\n It involves:<\/p>\n Instead of looking to flip a house quickly, you can hold onto it and increase your buying power with a 1031 exchange<\/a>. With a 1031 exchange, you follow certain steps to defer paying any capital gains tax when selling one rehabilitated house to purchase more investment properties.<\/p>\n When using a 1031 exchange, you must have had the intention of holding the property for productive use at the time of your purchase\u2014although the rules and regulations do allow for a change of intent after purchase when necessary.<\/p>\n Renting out your rehab property for a period of time in order to take advantage of a 1031 exchange is a great idea and definitely one that you should consider.<\/p>\n If you are an investor who has been flipping homes for profit, the diminishing returns may have you worried. However, you have options.<\/p>\n You can change your business model just a bit and adjust your activity. This can help you reduce your tax burden and maximize your \u00a0profit.<\/p>\n As Ashley Wilson cautioned in her recent article<\/a>: \u201cAs deals become more scarce, it is more important than ever to continue learning from our past so that we are still in business in the future!\u201d<\/p>\n![\"flip-houses-no-money\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2012\/09\/flip-houses-no-money.jpg\" "\\"\\"")
<\/p>\nMore Information From the Report<\/h2>\n
Other Important Housing Data From ATTOM<\/h2>\n
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While Flipping Profits May Be Down, You Still Have Options<\/h2>\n
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<\/p>\n1. Hold onto the property for 1 year and 1 day, and change your intent.<\/h3>\n
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2. Consider live-in flipping for a couple of years.<\/h3>\n
3. Change to the BRRRR method.<\/h3>\n
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4. Use 1031 exchanges to defer taxes on sales.<\/h3>\n
Bottom Line: Learn How to Adapt to Remain Profitable<\/h2>\n
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