How to avoid paying capital gains tax for flipping?

Buying & Selling Real Estate
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How to avoid paying capital gains tax for flipping?

Jasraj Singh
Member since 2020 · 295 posts · 56 votes

I wanted to know that how can I avoid paying capital gains tax if I want to sell the property. I know we do a 1031 tax defer exchange but thats only for investment properties. But how can i avoid paying capital gains tax if i want to sell the property and need cash?

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
6y

Your title mentioned a “flip”.  Not only does a true flip, bought just for purpose of repairing and selling for a profit, does not qualify for cap gains either....profits are taxed as ordinary income plus ss/med taxes of 15.3%. 

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  • Parin Shah
    Rental Property Investor · Chicago, IL · Member since 2020 · 4 posts · 1 vote
    6y

    @Jasraj Singh you answered your own question. If you take any gains the gov wants a cut you’re going to pay tax unless you use that 1031 to stimulate the economy and buy another property.

    1Reply
  • Jasraj Singh
    OP
    Member since 2020 · 295 posts · 56 votes
    6y
    Originally posted by @Parin Shah:

    @Jasraj Singh you answered your own question. If you take any gains the gov wants a cut you’re going to pay tax unless you use that 1031 to stimulate the economy and buy another property.

     Absolutely right! but what if I want to sell the property for immediate cash, how can I avoid paying taxes then?

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  • Joe Cassandra
    Rental Property Investor · Woodstock, GA · Member since 2017 · 517 posts · 772 votes
    6y

    You can't use 1031 on a flip unless it was rented or lived in for a time.

    Any property bought with the sole purpose of resale is disqualified from 1031.

    Theres no way to avoid taxes unless you spend the money on the business, you max out a self directed 401k, or carryover losses from rentals

    (I am not a cpa)

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    6y

    Your title mentioned a “flip”.  Not only does a true flip, bought just for purpose of repairing and selling for a profit, does not qualify for cap gains either....profits are taxed as ordinary income plus ss/med taxes of 15.3%. 

    3Reply
  • Andrew B.
    Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
    6y

    Sell houses at a loss and you won’t pay capital gains.

    In all seriousness, stop looking at flipping as an investment. It’s more like a retail business in the eyes of IRS. Asking how to avoid paying taxes is similar to a hardware store asking. Get a good CPA, take his (or her) advice, and keep good records so you can maximize deductions. There is no “secret” or trick to pay no taxes on your flip.

    2Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    6y

    @Jasraj Singh good advice below, if you are exchanging a rental investment and not flipping check out the concept of “boot”.

    0Reply
  • Jasraj Singh
    OP
    Member since 2020 · 295 posts · 56 votes
    6y
    Originally posted by @Joe Cassandra:

    You can't use 1031 on a flip unless it was rented or lived in for a time.

    Any property bought with the sole purpose of resale is disqualified from 1031.

    Theres no way to avoid taxes unless you spend the money on the business, you max out a self directed 401k, or carryover losses from rentals

    (I am not a cpa)

    Thanks a lot for responding! So you mean that I should start a business and show that I've spent all my capital gains on 401k and then I don't need to pay taxes??

    0Reply
  • Jasraj Singh
    OP
    Member since 2020 · 295 posts · 56 votes
    6y
    Originally posted by @Wayne Brooks:

    Your title mentioned a “flip”.  Not only does a true flip, bought just for purpose of repairing and selling for a profit, does not qualify for cap gains either....profits are taxed as ordinary income plus ss/med taxes of 15.3%. 

     Alright! thanks for letting me know, I'll definitely look into that! So then how much of my income is gonna get taxed? 20%?

    0Reply
  • Jasraj Singh
    OP
    Member since 2020 · 295 posts · 56 votes
    6y
    Originally posted by @Andrew B.:

    Sell houses at a loss and you won’t pay capital gains.

    In all seriousness, stop looking at flipping as an investment. It’s more like a retail business in the eyes of IRS. Asking how to avoid paying taxes is similar to a hardware store asking. Get a good CPA, take his (or her) advice, and keep good records so you can maximize deductions. There is no “secret” or trick to pay no taxes on your flip.

    Right! thanks man! But what do you think about a tax attorney?

    0Reply
  • Jasraj Singh
    OP
    Member since 2020 · 295 posts · 56 votes
    6y
    Originally posted by @Jonathan R McLaughlin:

    @Jasraj Singh good advice below, if you are exchanging a rental investment and not flipping check out the concept of “boot”.

     Alright! thanks man! but can you tell me what do you mean by "Boot"? I'hv searched it a lot but I still exactly don't know what that is and how does it work?

    0Reply
  • Adam Blachnio
    Rental Property Investor · North East US · Member since 2019 · 114 posts · 31 votes
    6y

    @Jasraj Singh

    There is other worst thing, that government may treat you as a DEALER if you're wholesale, but Don't know if F&F is subject to same treatment??

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    @Jasraj Singh

    Are you working with an accountant - What did he suggest? He will know the most information about you which would make him suitable to answer your question.

    I would suggest being able to deduct all the expenses you are entitled to.
    You are entitled to report deductions if it was ordinary and necessary(and reasonable) for the flip to occur.
    a $1000 extra deduction will save you $400 if the total tax rate is 40% which is average if you consider federal taxes, state taxes and Self-employment taxes)

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  • Jasraj Singh
    OP
    Member since 2020 · 295 posts · 56 votes
    6y
    Originally posted by @Adam Blachnio:

    @Jasraj Singh

    There is other worst thing, that government may treat you as a DEALER if you're wholesale, but Don't know if F&F is subject to same treatment??

    Thanks for responding mate! but I didn't exactly understand what you're trying to explain?

    0Reply
  • Jasraj Singh
    OP
    Member since 2020 · 295 posts · 56 votes
    6y
    Originally posted by @Basit Siddiqi:

    @Jasraj Singh

    Are you working with an accountant - What did he suggest? He will know the most information about you which would make him suitable to answer your question.

    I would suggest being able to deduct all the expenses you are entitled to.
    You are entitled to report deductions if it was ordinary and necessary(and reasonable) for the flip to occur.
    a $1000 extra deduction will save you $400 if the total tax rate is 40% which is average if you consider federal taxes, state taxes and Self-employment taxes)

    Alright! No not yet. but I think 40% is a lot and that's why I think I need to hire a CPA.

    0Reply
  • J.C. Martel
    Investor · Lawrence, KS · Member since 2012 · 50 posts · 15 votes
    4y

    Question for the group - If you flip in an S-corp, can't you take the first $40k (single) or $80k (married) as tax-free dividends? 

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