Protecting gains on flipping houses

[Matt Amundson]

Looking into flipping houses with a buddy, but wondering how everyone goes about not paying a capital gains tax after the flip? I am also getting into rental properties and wondering if it makes sense to put it into a 1031 with the profits to reinvest into rentals or do you just take the tax and reinvest it into more flips?

[Dave Foster]

@Matt Amundson,  Fix n flippers kind of fall into one of a few different camps:

1. Those who just love the adrenaline and joy of building and creating.  It's a passion.  They pay the tax because it doesn't get in the way of their model.

2. Those who flip to slowly get after tax cash to invest in longer term properties.

3. Those who need a job.  Flipping provides relatively quick cash in amounts that can sustain a life style.

The problem with flipping is that you don't pay capital gains rate as @Darius Ogloza said.  You pay ordinary income tax.  So you are tethered to a silent partner - Uncle Sam.  And in many cases he's almost a 50-50 partner with you.

Contrast that with the longer term horizon of rental investing.  You get tax write offs and income and amortization paid by the tenants.  And you get to use 1031 exchanges so you don't have to pay tax or recapture depreciation.  

Albert Einstein supposedly called compound interest the 8th wonder of the world and was quoted as saying - "Those who understand it will profit from it.  And those who don't will pay it".

Getting to use indefinitely deferred tax to benefit yourself is no small ting!