Those of you guys that have been at this awhile talk to me.... Is it a bad idea to use wholesale profits to pay for down payments on rental properties. Obviously one would need some cash reserves ICE. But are there any reasons why this is a bad strategy to employ? I heard about it on one of the podcasts. Could you roll over wholesale profits to a 1031 so you don't have to pay capital gains? Who has used this strategy?
I'm not certain I understand this question:
Could you roll over wholesale profits to a 1031 so you don't have to pay capital gains?
I'm not certain how wholesaling will produce capital gains. If you are wholesaling, you are typically selling contracts, not property, so there would be no capital gain. Even if you did close on properties and then resell them (similar to flipping but w/o the rehab), the real estate would be considered inventory and your earnings would be income, not capital gains.
As far as using your wholesale profits for a downpayment on a property. Like any other employment income, once you give the tax man his share, you can do what you please with the remainder.
Wholesaling results in ordinary income, taxed as such. So does flipping, for that matter.
A 1031 exchange is for rolling over the capital gain on a property held for investment, not as inventory.
for a 1031 exchange, it needs to be real property being transferred to other real property in an amount equal to or greater than the original amount.
you can't "1031 exchange" dollars earned from wholesaling, stock trading, gambling, etc. into real property. it has to be real property to real property.
The properties involved in a 1031 Exchange must be held for rental, investment or use in a business. Wholesaling, rehabbing, flipping, etc., involve properties that were held for sale and were not held for investment and therefore will not qualify for tax-deferred exchange treatment under Section 1031.
Thanks guys! You can tell I this is my first year huh? Good to know that wholesale/flipped property doesn't equal capital gains. I was under the impression it was. With that matter solved is wholesaling/flipping properties a fair method to fund down payments?
Originally posted by @Ryan Dossey:
With that matter solved is wholesaling/flipping properties a fair method to fund down payments?
Is working 9-5 at Chucky-cheese a fair method to fund down payments? Probably not a practical method, but its income, no different than wholesaling. ;-)
I have read/heard in the past that flipping property is pretty much the same as wholesaling vs rehabbing. Meaning... to wholesale a property is to contract and assign the property to another/investor... to flip a house is to buy a property and close and sell it to another/investor without fixing it up. Is that correct or somewhat correct?
A flipper typically rehabs a property and then resells it (either directly, via a realtor or, perhaps even using a wholesaler) ... they add value to the property itself.. The amount of value add and quality of the rehab will vary from flipper to flipper. I suppose a flipper could take a property into inventory and then elect to resell it w/o performing any rehab ... be a far more expensive approach than that of a wholesaler.
Wholesalers typically sell a contract and never take title of a property. In some instances, they may close and resell immediately; technically owning the property for the briefest of times, but probably still never registering title. Wholesalers provide a service to the seller and buyer, but add no value to the property itself.
Thanks for the response. I actually thought I read on a blog that a person bought property and without fixing it, resold it to a rehabber. Im pretty sure he specifically stated... "I flipped a property to a rehabber without doing any work to it", so I started thinking they were two different things in a sense.
Flipper get's used for a lot of things ... I use to think he was a porpoise on a 1970's TV show ;-)
I call what you are talking about a Double Close. So you buy a property at wholesale price, own it for literally minutes as it is sold to an investor who will Rehab and sell for a profit. Where as Flipping is buying a property with an aim to Rehab it and sell for profit.
Some people do what is known as "wholetailing". Where they purchase the property with cash then sell it as is at a mark up.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Join the Largest Real Estate Investing Community
Basic membership is free, forever.