Flip house or move into to save on cap gains

Long Island, New York
Buying & Selling Real Estate
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Flip house or move into to save on cap gains

Padraig SpellmanPro Member
Member since 2021 · 7 posts · 0 votes

Good evening , I currently have a deal that is going to make a good profit and am not sure if I should flip it or move into it and rent my existing house . I am worried about capital gains tax . My current house would cash flow. Can anyone offer some suggestions. It is in Long Island New York. Thanks 

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Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
1y
Quote from @Dave Foster:

@Padraig Spellman, @Jason Wray is on to something with his 1031 to refinance idea. To satisfy the 1031 exchange requirements the property must have been held for investment, and fix n flips do not meet this criteria.

If you approach it as more of a BRRRR strategy and put a renter in it for a year, that would demonstrate that intent. Funny enough there is no statutory holding period but longer is always better in this case.

Moving into it initially would allow you to start the two year clock on it as your primary residence. Which would turn the profit tax-free. But require a longer hold period than a 1031 exchange.

Occasionally we get investors who purchase an investment property to hold but end up having to prematurely sell despite their intent. Maybe something had a major effect on being able to get the property rented like a bear moving into the neighborhood (true story) or an unsolicited offer you couldn't refuse. These things can certainly happen but if they happen multiple times it starts to look a lot less accidental.

Padraig,  

My advice would be to reach out to Dave Foster I have heard all good things and he is the 1031 Exchange Pro.  It woudl be wise to go that route and save yourself a ton of cash and the hassle of dealing with IRS and taxes!  Just message @Dave Foster

@Dave Fosterundefined

[email protected]727-637-4289
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  • Jason WrayPro Member
    Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
    1y

    Padraig,

    Have you thought about doing a 1031 exchang and put it into another investment property to avoid the capital gains?  You can do a cash out refinance in as little as 6 months to pull the cash out and avoid a tax hit.  You have to put a few thing in motion and have a game plan to ensure it works out but pretty straight forward.  

    [email protected]727-637-4289
    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    @Padraig Spellman, @Jason Wray is on to something with his 1031 to refinance idea. To satisfy the 1031 exchange requirements the property must have been held for investment, and fix n flips do not meet this criteria.

    If you approach it as more of a BRRRR strategy and put a renter in it for a year, that would demonstrate that intent. Funny enough there is no statutory holding period but longer is always better in this case.

    Moving into it initially would allow you to start the two year clock on it as your primary residence. Which would turn the profit tax-free. But require a longer hold period than a 1031 exchange.

    Occasionally we get investors who purchase an investment property to hold but end up having to prematurely sell despite their intent. Maybe something had a major effect on being able to get the property rented like a bear moving into the neighborhood (true story) or an unsolicited offer you couldn't refuse. These things can certainly happen but if they happen multiple times it starts to look a lot less accidental.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
    • Jason WrayPro Member
      Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
      1y
      Quote from @Dave Foster:

      @Padraig Spellman, @Jason Wray is on to something with his 1031 to refinance idea. To satisfy the 1031 exchange requirements the property must have been held for investment, and fix n flips do not meet this criteria.

      If you approach it as more of a BRRRR strategy and put a renter in it for a year, that would demonstrate that intent. Funny enough there is no statutory holding period but longer is always better in this case.

      Moving into it initially would allow you to start the two year clock on it as your primary residence. Which would turn the profit tax-free. But require a longer hold period than a 1031 exchange.

      Occasionally we get investors who purchase an investment property to hold but end up having to prematurely sell despite their intent. Maybe something had a major effect on being able to get the property rented like a bear moving into the neighborhood (true story) or an unsolicited offer you couldn't refuse. These things can certainly happen but if they happen multiple times it starts to look a lot less accidental.

      Padraig,  

      My advice would be to reach out to Dave Foster I have heard all good things and he is the 1031 Exchange Pro.  It woudl be wise to go that route and save yourself a ton of cash and the hassle of dealing with IRS and taxes!  Just message @Dave Foster

      @Dave Fosterundefined

      [email protected]727-637-4289
      2Reply
  • Padraig SpellmanPro Member
    OP
    Member since 2021 · 7 posts · 0 votes
    1y

    Thank you Jason for your response . Yes 1031 is an option . I didn’t think about a cash out refi , was just thinking of nigh g in for a bit and renting out my primary . But that might work as well .. 

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  • Mohammed Rahman
    Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes
    1y

    If you sell the new place as a flip, you’ll likely owe short-term capital gains tax if you’ve owned it for less than a year, which is taxed at your ordinary income rate (so it could be hefty). On the other hand, if you live in the property for at least 2 years, you might be able to avoid up to $250K in capital gains taxes as a single filer ($500K if married) under the IRS primary residence exemption.

    Now, renting out your current house (which cash flows—huge plus) means you get to start building that long-term wealth through rental income and appreciation. You could also take advantage of depreciation write-offs to reduce your tax liability on that rental income.

    So here’s the vibe:
    If the profit from flipping the new place is big but you’ll get crushed on taxes, living in it for 2 years might be worth considering. Meanwhile, your current house becomes a rental asset that pays you monthly and keeps appreciating.

    It depends on your timeline, how big the flip profit is, your current tax bracket, and whether you’re comfortable moving.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    Thanks for the shout out @Jason Wray.  I sent a collegue request to you @Padraig Spellman in case you've got questions best asked off line. 

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    1y

    If you like the property more then you can move into it. If the property would cashflow after a refi you can go that route too. I would run #'s. If either or cashflows when rented then it's preference. 

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