Pensacola, FL · Member since 2015 · 6 posts · 0 votes
Hello all, I am just starting out in the rehab market. After reading through page after page of IRS documents I still feel that I am missing something. If we purchase a house cash and I rehab using my Contractors license are we on the hook for capital gains tax or straight income tax? Thanks to anyone who can clarify.
@Chris Clanton it depends on the intent of the transaction. Since the intent is to flip, you will, more likely than not, be required to report the transaction on Schedule C subjecting your income to your ordinary tax rates plus both halves of SE taxes.
Plenty of ways to avoid income tax though. Speak with a knowledgable CPA prior to engaging in any activity to fully understand the tax impact of your strategy.
This is a tax professional question...but with the disclaimer that I am not one, I would say it depends on how you are going to compensate your efforts for the rehab work. If you, as a GC, intend to be paid for your services for the rehab work, then that income is reportable as ordinary income. Depending on when you and your wife sell the property will dictate the treatment of the gain you realize for tax purposes. Within 12 months of acquisition, it is ordinary income. After 12 months, it is capital gains. I'm sure there will be a tax pro or two lurking around the BP pages that can further clarify this. If not, get to a tax professional you know and trust to make sure you know how to proceed.
We are only looking to hold the property long enough to quiet the title and complete repairs / updates. Our or my plan is to do maybe 2-4 per year considering we are limited by the amount of cash we have. Just don't want to get to April 15th and have a heart attack, don't mind paying taxes just don't want to do something stupid and pay way more than required.
@Charlie Fitzgerald You make great points and I appreciate the contribution! We should look at your statement regarding the 12 month hold period a bit more closely. The IRS looks at the intent of the transaction, not the hold period, and classifies these flipped properties as inventory whenever they can. Specifically, the Winthrop factors have been established and used by the courts to determine and evaluate intent. These factors are:
(1) the taxpayer’s purpose in acquiring the property;
(2) the purpose for which the property was subsequently held;
(3) the taxpayer’s everyday business and the relationship of the income from the property to the taxpayer’s total income;
(4) the frequency, continuity, and substantiality of sales of property;
(5) the extent of developing and improving the property to increase the sales revenue;
(6) the extent to which the taxpayer used advertising, promotion, or other activities to increase sales;
(7) the use of a business office for sale of property;
(8) the character and degree of supervision or control the taxpayer exercised over any representative selling the property; and
(9) the time and effort the taxpayer habitually devoted to sales of property.
If you review , T.C. Memo 2012-243, you will see that simply holding property greater than 12 months is not a great enough influence on overall intent to retain "investment" status and receive the favorable capital gains treatment. The property will still be subject to ordinary tax rates and potentialyl capital gains upon sale.
We plan to characterize the transactions as normal business and not try to skirt the regs. Since we are actively rehabbing and reselling would this asset be considered as a inventory item like a car on a car lot or is there something special about real estate?