200k profit from my 1st flip, What now?

OP

Boston, MA · Member since 2014 · 12 posts · 29 votes

9y

Well I've done some research on 1031 exchange and from what I understand you cant 1031 exchange on a flip and its intened for a rental property that you decide to sell. Please correct me if I'm wrong (Please let me be wrong)

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

9y

This is correct you can't use a 1031 exchange for a flip. I'm sorry- but he is wrong and you are correct :)

Are you sure the profit is going to be 150-200k?

Does this factor in purchase price, holding costs, renovation costs, reduction on gain from selling expenses ect?

I would set up a bank account for the LLC asap. The main purpose of an LLC is protection and if you intermingle personal with business you pierce that veil and can totally un-do any protection benefits.

I don't have a recommendation for a CPA in your area but I'd take a look around the tax forum on here. There are a handful of real estate specialized accountants who would be happy to help you figure out the best solution. An election to be taxed as an S corporation for your LLC may benefit the situation but it will depend on your personal circumstances.

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

9y

Originally posted by @Ronald Rohde:

You should probably be familiar with 1031 exchange. $200k as ordinary income is painful

You should probably be familiar with 1031 exchange haha these can't be used for flips :)

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OP

Boston, MA · Member since 2014 · 12 posts · 29 votes

9y

@Natalie Kolodij thanks for the confirmation. As for the profit, yes I am sure purchase price was $124k reno was 46k and about $14k in monthly payments over 8 month. Oh and like 9k in upfront points. Sale price is $399k

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

9y

Dang- well. Unfortunately you can't be that mad at a tax bill because that's a helluva profit.

Again- There may be some structuring that could help reduce that a bit. It's going to pass through as ordinary income subject to self employment taxes. Same as if you bought 124,000 chairs for $1.00 each and then sold them all for $3.22. As far as the IRS is concerned it's the same.

So that being said- find a CPA who specializes in real estate. But for your own knowledge spend a little time looking into normal business deductions. Many will apply here. You can also look into structuring the sale as a rent to own situation...in which case you may be able to utilize a 1031.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

9y

@Dejahn Renrick, Once you decide to venture into buy and hold I can address your 1031 issues more specifically but @Natalie Kolodij's absolutely right. If your intent in purchase was primarily to sell then no 1031.

But for your flipping business you may want to talk to your cpa about setting up a master LLC (maybe taxed as an S corp if you really want it to be a business). The LLC's for each property become wholly owned LLCs of that master LLC. Or they stand alone with a development agreement with the master LLC. This kind of arrangement can be a head ache with 1031 but with a flipping business it can be advantageous to consolidate your activities and provide going concern for finance purposes.

You don't need a MA accountant but you do need an accountant familiar with MA. One of the good ones already been responding to you right here. Just don't call @Natalie Kolodij one of the guys - she gets a little testy :)

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Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

9y

Originally posted by @Natalie Kolodij:

Originally posted by @Ronald Rohde:

You should probably be familiar with 1031 exchange. $200k as ordinary income is painful

You should probably be familiar with 1031 exchange haha these can't be used for flips :)

Exactly my point! If he rents it out for a year, refinance to pull out cash, much better tax liability than flipping and taxed at 35%!

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

9y

Ha! @Dave Foster A paying tax client can call me whatever as long as their books are clean :)

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Katherine S.

Investor · Grosse Pointe Shores, MI · Member since 2017 · 160 posts · 74 votes

9y

@Natalie Kolodij

There's a big difference between $150k and $200k. What don't you know that you have such a range?

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Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

9y

Natalie comments "I would set up a bank account for the LLC asap. The main purpose of an LLC is protection and if you intermingle personal with business you pierce that veil and can totally un-do any protection benefits."

see this on piercing the veil.

1 Reply

Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

9y

Um well since I got tagged...He mentioned in the initial post that he was sifting through several offers. Maybe he's trying to pin down which works best? Sometimes money is trumped by fast closing, seller contingencies, ect

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Michael Kalisch

Investor · Airmont, NY · Member since 2017 · 30 posts · 7 votes

9y

What is the minimum holding time, or other requirements to qualify for the 1031 exchange ?

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

9y

@Michael Kalisch, There is no statutory holding period that qualifies a property for 1031. The standard is "intent". If your intent in purchasing a property is primarily to resell then it is considered to be inventory and not available for 1031 treatment. Property eligible for 1031 is property that you purchased with the intent to..."hold for productive use in business for trade or for investment. Length of time is certainly one way to demonstrate intent but there are many other ways including correspondence with professionals, actual use, standard practice all paint part of the picture.

Most conservative folks feel comfortable with a hold of more than one year. But there are always situations where a hold period of less than a year would be appropriate.

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Charles Kao

Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes

9y

Dejahn Renrick Great problem to have. Maybe consider a Solo 401k for your LLC when you establish one so you still can reinvest in real estate. I just set one up myself recently. My advisor even referred me to a few nonrecourse lenders that will lend off my Solo 401k.

OP

Boston, MA · Member since 2014 · 12 posts · 29 votes

9y

@katherine

@Katherine S. I used a pretty broad range because I wasnt sure how to break break down profit. One could argue that profit is after all taxable deductions, which in my case could be around 150k. But if we are just talking profit after obvious expenses and holding cost then I'm closer to 200k

Justin ReppPro Member

Realtor · Beverly, MA · Member since 2015 · 108 posts · 19 votes

9y

He used hard $ so I believe that any hard $ lender won't allow him to rent it out. Correct me if I'm wrong.

OP

Boston, MA · Member since 2014 · 12 posts · 29 votes

9y

does anyone have a business credit card in their real estate Llc? I'd like to know if you had to be in business over two years? How do they determine your credit worthiness?

Michael P.

Real Estate Investor · Dallas, TX · Member since 2009 · 183 posts · 153 votes

9y

@Dejahn Yes I have a LLC credit card but keep in mind they still check your personal and business credit. Still nice to have the card but yeah they still view you personally as the one who is paying it.

Congrats on your first flip that is one helluva profit.

Take a chill for a week or two after the closing and just reflect and use that time to wisely plan your future. It sounds like you might be thinking about upping the game and you might make some foolish errors. Just rinse and repeat your next flip, open up the LLC bank account and try to run everything business related from there.

Find out your tax burden and make sure that money is set aside or will be available in a year, you don't want to f with the IRS.

Goodluck...

Rob Golob

Investor · Valparaiso, IN · Member since 2015 · 84 posts · 47 votes

9y

Congratulations. Nice profit. However I don't think anyone mentioned yet the NICE part was obviously the BUY Purchase price + rehab was 42% of ARV. Is there a particular story? Please tell....

1 Reply

OP

Boston, MA · Member since 2014 · 12 posts · 29 votes

9y

@Rob Golob I would be glad to share the story in detail but figured I should wait until I officially close to make it official. As soon as I close I will post that day and can tag you.

@Michael P. I dont mind if they pull my personal credit but would hate for it to my already maxed Debt to Income.

I will say that I am considering quitting my day job since this profit would be almost double my current income and I already have another property that after reno should net around 110k

Yanis P.

Steger, IL · Member since 2016 · 57 posts · 13 votes

9y

@

I recommend you to read about establishing business credit, usually it take up to 3 ears until you can get Business CC's, BUT if you do your profile the right way than you should be able to open them in less than 6 month. Try to read forums about that, get to know what is DUNS number, 411 directory, web page....

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

@Dejahn Renrick Congrats on a tremendous deal. As others have mentioned already that's an insane profit and I'd also love to hear the nitty gritty of the deal. Please tag me in that post as well.

Pedro Martins

Rental Property Investor · Louisville, KY · Member since 2016 · 48 posts · 55 votes

9y

@Dejahn Renrick, if you do not have an LLC bank account, where were the funds to pay for the purchase, the hard money and the renovation coming from? this question MAY have a bearing on what tax deductions you can take or not.

I don't think you can fix this retroactively for this flip (shame) but as some other folks have said, you should get the bank account, make your election to become an S-corp so that for your next flip you have a chance of escaping some of the heavy taxes that you will be subject to for this flip.

Tim Youse

Rental Property Investor · Baltimore, MD · Member since 2016 · 153 posts · 158 votes

9y

Originally posted by @Justin Repp:

He used hard $ so I believe that any hard $ lender won't allow him to rent it out. Correct me if I'm wrong.

In that situation, you could refinance to a conventional loan to pay off the HML...but wouldn't make much sense if the plan is to sell. It is an option though if the house were to sit on the market too long.