my question is simple. When flipping houses, what is the thought process on capital gains taxes? A way around? Or just except you are looking up to 35% and move on? Thanks for any thoughts on this. Tim

I'm not a tax guy, but my understanding is the flipping is active income and not passive so it's not capital gains, it gets taxed as normal income.

@Tim ODonald, Whether or not a profit is taxed as ordinary income or capital gains has to do with two things - Your intent and the length of hold. If you own a property for more than a year and sell it is taxed at capital gain UNLESS... the IRS determines that you purchased the property with the primary intent of resale in which case the asset is treated as inventory, you are a dealer you pay ordinary income tax. Having an LLC does not change the above. It just changes (maybe) who pays the tax. LLCs are for liability not taxation protection. Other entities - maybe. There is no statutory holding period that qualifies your property for 1031 treatment. There is only the standard of intent and how you can demonstrate that intent. If you bought the property to fix n flip then your intent is resale and you cannot do 1031s. If your intent was to hold for productive use (like putting into rent) then it qualifies for 1031. Intent is what you say and what you can show! So changing the model like Account Closed suggested can be a great way to give you access to 1031 exchanges and their tax mitigation power. Instead of fix n flip your model becomes fix n rent n evaluate. But the deferral is indefinite and can be permanent with the right planning. So I don't subscribe to the whole "pay the piper anyway" thing any more than I think that IRAs are worthless because you have to pay the tax one day also. Every year of deferral is a year you get to make money on the tax. And there are plenty of ways to eliminate the tax in your lifetime and for your heirs.

Account Closed Hate to say it, but you can not do a 1031 exchange on flips. Mark

Tim, It depend on where you live and how long you hold the property. If less than 1 years, you can face up to about 48% tax. around 15 % Self Employment tax, 25% federal tax and 7% state tax and 1.1 BS tax if you in that bracket. You can't do 1031 exchange unless it rental

@Dave Foster , very well said. I really appreciate all the help on this topic. From everyone! I think as I build my team of professionals, I need to equate a new tax pro. My guy is pretty good but even he will admit, not the best in the field of real estate.

True. However, after you rehab, if you rent it out for a year first, you can do a 1031. Not a true fix and flip strategy, but it could work for some investors.

Look into 1031 Exchanges. This should allow you to defer cap gains for years to come. However, eventually, you have to pay the piper. Also, don't fall into the trap of overpaying for your next deal just to take advantage of the 1031. It may be wiser to pay the taxes and buy a market deal than to 1031 and overpay.

If you have it as your primary residence for 2 years, pay zero capital gains taxes. If you have it in an LLC, S corp. you can write a lot off, and do a W2 / K1 split. (30% / 70%) I believe.

Capital gains. Suggestions ?Capital gains. Suggestions ?

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