So I jumped on the band wagon and bought a fixer upper..........

53 Replies

I was told all these wonderful things about how I would get my money back for the work I put into the home.  Ahhahhaha, no, that's not the way it works.  You got repairs and you got improvements and only the REPAIRS can be deducted in the year you spent the money for the work and trust me, NOTHING IS CONSIDERED A REPAIR IN THE EYES OF THE IRS.  ITS ALL CONSIDERED AN IMPROVEMENT.  Guess how long it takes to get credit for an improvement?  Bout 150 friggen years.  I am so frustrated with this entire process.  I must have spent 40 THOUSAND DOLLARS fixing up this dump.  Thank God my plan was to rent it out which I did for 3 years and yesterday I sold it.  But guess what, now I gotta pay capitol gains in excess of 8 thousand dollars because it was a rental property.  Trust and believe you better know what you are doing listening to all these people talking about how wonderful this sh** is, cuz it can certainly mess you up if you dont.  

@Angelique A.

I am sorry to hear that your REI experience did not go the way you wanted. However, how well did you do your research and crunch your numbers before you started your journey? I am trying to understand as well, were you trying to do a BRRRR strategy, a flip or an actual rental?

@Angelique A.

Two things are painfully obvious after reading your post:

1. You didn’t have a clear exit strategy in mind before you made this purchase

2. You could have used a little more research time to better understand all of the implications of what you were getting yourself into.  

It’s not clear to me from reading your post what your objective was when you made this purchase as you rented it for three years, but are not happy with the tax benefits or lack thereof.  And you’re not happy with the capital gains taxes after selling.

The saying goes “you make your money when you buy a property” and it sounds like you dove in head first without a solid understanding of that point only to experience an outcome that was not what you expected.

The great news is that the experience you gained here has the potential to be invaluable, and totally reshape your approach to investing.  There are a lot of people making a lot of money from real estate and the difference between you and them is the time they’ve invested into learning and perfecting their processes.  Only you know how much time you spent doing the above, but if you aren’t getting the results you desire, the answer isn’t to do (whatever you intended to do above NO DISRESPECT), but to learn from your mistakes and avoid making the same ones next time.  Good luck on your journey, and don’t let this one setback deter you. 

 “The champ will always be the champ so long as (s)he continues to get up!”

Congratulations on the sell! Sorry to hear you've had a difficult time with this investment property.  You could have done a 1031 exchange to defer capital gains taxes, however, it may be too late for that now as there is a time frame for which you need to identify the next investment property and close.  Maybe you can partner with someone currently working on a deal.  Not sure if that's an option, but it may be worth looking into to avoid paying the taxes.

omg, i got so Royally messed up all the way around the block.  I had a Lawyer set up my llc.  He over charged me, but I made him give me most of my money back.  The idiot set me up as an S Corporation that took me over a year to get out of.  Why would you set me up as an S corp and Im a sole member.  omg, do you guys want to hear anymore about the mess I got myself into with this real estate business?  Im ready to shoot myself in the head, lol.  Yeah, Ive learned a lot, but I wouldnt want my worst enemy to make the mistakes I did which is partly the reason Im posting my experience.  The other part is to friggen vent my frustrations.

You know how you can do all the research in the world and think you know about something, then you get involved only to find out none of that shyt applies to you.  I paid less than 10K for the house.  Smart move right?  However, I got into this business because I was under the impression that the repairs would be deductible and that my friends is what I learned is BS.  

That's why you form a c Corp to do flips. All expenses offset the income generated from the flip. Yes it's true you won't be able to offset your own income, but it's better than paying that year. You can also pay yourself back via salary, subject to payroll taxes. If you do decide to keep it, you sell it to yourself or a LLC rolling to you so you can slowly depreciate the property.

@Angelique A., This is why the team you assemble to work with you is the single most critically important decision you will make as a real estate investor.  Generally your own research into topics will only create that situation where you "know just enough to be dangerous".  That's when the team of professionals around you are so important.  What you really need to know is how to identify the best professionals for your team.

A good accountant could have guided you through the remodel process to maximize repairs and minimize improvements. 

A good attorney structures your affairs to be cost effective and appropriate to you (the guy you used sounds a little sketch - LLC/S corp for a $10K house???)

Good trades make the work happen and happen efficiently both from a cost and quality perspective

A good QI could have saved you the $8K in capital gains tax and depreciation recapture with a 1031 exchange since you ended up renting it instead of flipping it.

A good realtor knows the introductions to make to the above folks and can be invaluable in the buying and selling and due diligence processes.

Take heart - The rookie tax can be expensive.  But you generally only pay it once!

@Angelique A. - the idiot lawyer who set your business up as an S-Corp probably was under the impression that you were a serious investor (based on your acquiring a property at 10k and rehabbing it/ there’s a name for that strategy you know) and was trying to save you money by structuring your business such that you could pay yourself a portion of your profits (and pay taxes on only those payments), while retaining the remaining untaxed portion.  There nerve of that stupid lawyer!  Lol

Oh Jesus Tom,  I needed someone like you to explain to me the best plan of action.  When I found out I would have to pay the tax lady 500.00 to do my taxes (just because of the S Corp filing), I almost lost my ****.  Anyway, as someone just starting out, this stuff is waaaaaaay too complicated for a newbie with just one 10K property.  I was not guided properly and that's what is necessary for a person getting into this business.  Guidance.

Shavar, is your middle name Shade?  It should be.  You obviously dont remember/understand how complicated this stuff is for a newbie, but that's ok.  I wouldn't expect someone with your vast knowledge and experience to understand.

@Angelique A. I for one am appreciative of you sharing your UN-success story. We need more of those, and personally think we even need a place dedicated to the deals gone wrong! You learn so much more from mistakes than successes in my opinion. We all know how a successful deal should look, but there are so many things you don't even know to consider when just starting out.

Thanks for sharing!

Thank you Dave Foster, you are sooooooo right on all your points.  And speaking of the trades, lololol, omg, I invested in a bad area that I had never been to before, 70 miles away from my home.  I drove up every weekend for a year to manage the workers and do some of the work myself.  I tried to use people in the neighborhood to do the work so I could help them and help the community.  That was mostly a disaster, lol.  I ended up suing 2 contractors one of which was licensed.  I did win in court but uhh, Nightmare just the same.  I was very lucky to have come out mostly on top of this nightmare.  I sold the home for 55K.  Will I do it again.  Hell NO.

I shouldn't say I wont do it again.  I will use Roofstock (I think) next time. I still got some research to do on them, but so far I like what Im reading.  When I sell my primary residence, I will not buy again, I will rent, and I will buy a couple of investment properties buy and hold.  I think, lol.  

Originally posted by @Jessica G. :

@Angelique A. I for one am appreciative of you sharing your UN-success story. We need more of those, and personally think we even need a place dedicated to the deals gone wrong! You learn so much more from mistakes than successes in my opinion. We all know how a successful deal should look, but there are so many things you don't even know to consider when just starting out.

Thanks for sharing!

 I don't think anything is that wrong here..  S corp other than manager member is usually for higher volume folks I don't do S corp simply because if you have a bad year you cant recapture loss's in following years.. like when the world came to an end in 08 to 2011 I was able to go back and recapture over 500k of personal income tax I paid in previous years.. S corp would not have allowed that.. that 500k kept me alive during the wipe out years. that's one.

two is recapture.. most don't talk about it but once you decide to go into rental real estate your stuck.. this is why I have a pretty strong opinion on why real estate needs to appreciate and that buying for cash flow in non appreciating markets can bite you.. if you keep them for ever no big deal you hand them down.. but if you have no true equity there is nothing to 1031 and now you have to claim this recapture which makes selling costly as in your going to lose money you may have made temporary cash flow but your IRR or your actual returns could very well be negative to quite negative.. no one talks about what happens if I want to sell.. now for those that own free and clear or have a bunch of equity its not that painful to sell but if you have little to none your writing a check sometimes to get out of the hamster wheel.. its all Ra Ra Ra on rentals path to freedom and all that.. it can be but many many cases are like this you just don't hear about them.. its happened to me personally and its painful.

Keep in mind average hold time for any real estate in the US is 7 to 8 years..  very few hold forever. 

This thread is highly entertaining and knowledgeable.  Thanks for all your posts and everyone's comments.  Sounds like you got a lot of hard lessons out of the way in your first deal.  I wouldn't dare say you're done learning though.  None of us ever stop learning.  You've got a LOT of commitment and hussle!  You will find success with a little more education under your belt and the right team around you!  Best of luck!

Buying a 10k house in a bad area is a HUGE challenge for anyone...especially for a newbie.

So take what you learned and grow to make better decision the next time.

@Jay Hinrichs I actually agree that it wasn't necessarily unsuccessful and thought about that after I posted.. however I do wish more people would post about mistakes or unexpected negative things that happen. 

It seems to me it would be a shame to have learned what *not* to do, and then just walk off into the sunset and never apply the knowledge. Knowledge without application is largely useless. Just reading your post there were warning flags all over the place, that probably could have been avoided if you had been posting/reading here before your purchase:

1. Purchase price $10k. OK, that right off the bat suggests a total basket case house or a house in an area so bad no one will touch it. Pretty rough stuff to get started with.

2. 70 miles away. Usually best for new investors to get their feet wet in their own town/area. You know your own neighborhoods and probably know some contractors/trades people.

3. Trying to "help the community". Investing is for yourself first and foremost. If the community is helped because you fixed up a former dump, fine, but trying to socially engineer your investment makes you a charity.

4. Setting up legal structures that were completely unnecessary for someone with one property. 

5. Selling after a short period of time. Holding rental property is generally a long-term prospect.

Aside from that, a couple of things don't make sense:

1. You only pay capital gains on profits. If you spent $10k buying the property and $40k fixing the property and sold it for $55k you didn't have enough profit to pay $8k in capital gains, even after recapturing depreciation. So something is wrong with this equation.

2. Repairs vs. improvements is only disallowed if the IRS audits you and reverses your filing. The IRS issues guidelines on what constitutes a capital improvement vs a repair, but it is up to you to file based on how you believe it fits. Completely replacing a roof constitutes a capital improvement, that's a clear one. But lots of other things are a judgement call. And for small owners the IRS gives you a lot of leeway to declaring repairs vs. improvements through safe harbor. If you filed everything as an improvement and depreciated it, you either need a different accountant or should have done it differently yourself.

@Angelique A. - anyone who self proclaims to have jumped on the RE bandwagon, then fell off only to complain about it deserves a little friendly shade.  You’ll be fine, and it’s not like I told a lie, just an unpleasant truth in your case.

Thanks to all who have compassion for my experience.  This was the second hardest thing Ive done in my life.  Im at work but when I get home, I will read your comments in depth and respond as best I can anyway.  Some of what you guys are posting might as well be in a foreign language, lol.  

@Angelique A. - it’s ok if Real Estate is not for you. One of the best things I did to build wealth was buying a foreclosure that was ready to move into except it needed paint (smoke smell) that was a 5/3 and rented 4 bedrooms to professional women and lived in one. Rarely saw them because they were busy but they paid me 2000+/mo plus 4/5ths utilities and my

Mortgage was 1500. If I had sold shortly after moving, I’d’ve capitalized on the irs free 250k capital gain because I lived in it for 2 years. Also was able to put a cheap mortgage on it at 4% for 30 years. That’s my best tip for making $$$ in real estate assuming you aren’t a stickler about strict privacy and are willing to share your kitchen and laundry.

JD Martin wrote:  Aside from that, a couple of things don't make sense:

1. You only pay capital gains on profits. If you spent $10k buying the property and $40k fixing the property and sold it for $55k you didn't have enough profit to pay $8k in capital gains, even after recapturing depreciation. So something is wrong with this equation.

Im so glad to hear this.  My tax lady, who by the way did warn me before selling the property that I would have to pay capital gains, but she didnt say how much.  I read its 15% and assumed I would have to pay 15% of the 55K, so that's where Im getting the 8K figure from.  I hope you're right, because after not being able to deduct hardly any of the money I spent for the rehab, and now having to give the IRS all this money, Im just about ready to throw in the towel.

2. Repairs vs. improvements is only disallowed if the IRS audits you and reverses your filing. The IRS issues guidelines on what constitutes a capital improvement vs a repair, but it is up to you to file based on how you believe it fits. Completely replacing a roof constitutes a capital improvement, that's a clear one. But lots of other things are a judgement call. And for small owners the IRS gives you a lot of leeway to declaring repairs vs. improvements through safe harbor. If you filed everything as an improvement and depreciated it, you either need a different accountant or should have done it differently yourself.

Well, maybe there is leeway, but i wasnt luckey enough to find an accountant that had the balls to challenge the standard.  There is plenty of information out there regarding what is considered a repair vs improvement and I wasnt about to go f'ing with the IRS and get myself in trouble with an audit so nope, I thought it best to stick to the standard.  For example, I paid 8K to upgrade the electrical on the house.  Guess what that is considered?  A friggen improvement.  Im sooooo done.