Flip property turned principal residence? tax considerations

Tax, SDIRAs & Cost Segregation
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Flip property turned principal residence? tax considerations

Mike Komenda
Homeowner · Erie, PA · Member since 2011 · 6 posts · 1 vote

Thinking out loud a bit here but there is no better place to do it. My wife and I are at the in between stage of our careers where our salaries are going to more than double in the next 4 years.

My family has been in a house for 4 years and we would be happy right now selling for break-even of the price we paid (73k). We owe about 50 on it through family member issued private loan.

I just purchasd through auction what I intended to be a single-family house flip for 21k. ARV of 8-10k repairs is 83-85k, a profit of 50+k (160%) in the very short term.

. Its twice the size of my house, in a better location in the city, and needs about 8-10k in from what I see So far to be cosmetic and some plumbing work. I originally intended this to be a 3 month flip. However, factoring in taxes as ordinaryi income from profit, I am leery of shelling out that much in taxes. Single family homes don't really appeal to me from a buy and hold standpoint, as I already own a 2 unit doing that. if I found a good tenant, market rent of about $750-800/mo would allow me to pay off a 30k loan in 7-8yrs. This area is not an area of appreciation, so we can't figure on that.

I mentioned to my wife the idea of moving in to the house (after a 3 month renovation) due to it being in a better location and to my surprise, she was tentatively on board (with about an extra 5k of upgrades of course (new walk in shower, open lower level floor plan, some flooring, etc).

What makes the most financial sense and why?

1. Sell my home for break even and move into the newly renovated "flip" for a few years, allowing me to sell my home in a fringe neighborhood and move to a slightly better neighborhood mortgage-free. Then after 3 years sell the property and transfer the profits tax-free into our dream home we plan on building (or renovating).

2. Stay where I'm at and sell the "flip" quickly for approx. 160% of price+repairs and pay the tax bill (on 50k profit)

3. Try to rent the flip for a year, then sell to get long term capital gains tax rates.

Being that its the end of the tax year and I plan on shelling out a lot of repair/ upgrade money into the house in 2013, how would I handle it from tax perspective if I am unclear of my plans for the property (move-in/rental/flip)?

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    12y
    Originally posted by Mike Komenda:
    Thinking out loud a bit here but there is no better place to do it. My wife and I are at the in between stage of our careers where our salaries are going to more than double in the next 4 years.

    My family has been in a house for 4 years and we would be happy right now selling for break-even of the price we paid (73k). We owe about 50 on it through family member issued private loan.

    I just purchasd through auction what I intended to be a single-family house flip for 21k. ARV of 8-10k repairs is 83-85k, a profit of 50+k (160%) in the very short term.

    . Its twice the size of my house, in a better location in the city, and needs about 8-10k in from what I see So far to be cosmetic and some plumbing work. I originally intended this to be a 3 month flip. However, factoring in taxes as ordinaryi income from profit, I am leery of shelling out that much in taxes. Single family homes don't really appeal to me from a buy and hold standpoint, as I already own a 2 unit doing that. if I found a good tenant, market rent of about $750-800/mo would allow me to pay off a 30k loan in 7-8yrs. This area is not an area of appreciation, so we can't figure on that.

    I mentioned to my wife the idea of moving in to the house (after a 3 month renovation) due to it being in a better location and to my surprise, she was tentatively on board (with about an extra 5k of upgrades of course (new walk in shower, open lower level floor plan, some flooring, etc).

    What makes the most financial sense and why?

    1. Sell my home for break even and move into the newly renovated "flip" for a few years, allowing me to sell my home in a fringe neighborhood and move to a slightly better neighborhood mortgage-free. Then after 3 years sell the property and transfer the profits tax-free into our dream home we plan on building (or renovating).

    2. Stay where I'm at and sell the "flip" quickly for approx. 160% of price+repairs and pay the tax bill (on 50k profit)

    3. Try to rent the flip for a year, then sell to get long term capital gains tax rates.

    Being that its the end of the tax year and I plan on shelling out a lot of repair/ upgrade money into the house in 2013, how would I handle it from tax perspective if I am unclear of my plans for the property (move-in/rental/flip)?

    I'd move into it, rent the current house. Live in the other for at least two years after completion of renovations and sell. Move back into the house to live in at this point. Enjoy the funds and use it to purchase another property for investment. This avoids the taxes and will put you in a better situation.

    You simply keep track of the expenses for each individual component.

    -Steven

    [email protected]224-381-2660
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  • Brian Mathews
    Contractor · Round Rock, TX · Member since 2013 · 767 posts · 389 votes
    12y

    I guess the answer would be exactly how fringe is it? And how fringe will it be in 3 years. And WMW. What mama wants. Will new house carry a mortgage or will it be free and clear, even after repairs? If older home isn't too fringe and won't be for a while. I might flip 2nd house, take money and pay off 1st house and be debt free on housing. Or if you have any other debt, knock that out, then pay down mortgage. Then in a few years, you'll have a paid for house that you can sell. Pay yourself a mortgage payment into a money market or something low risk and in a few years, you'll have a great downpayment on another house or it will allow you to do flips along the way cause you don't have a house payment.

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  • Mike Komenda
    OP
    Homeowner · Erie, PA · Member since 2011 · 6 posts · 1 vote
    12y

    Brian, my current t neighborhood that I referred to as "fringe" really isn't too bad at the moment but the problem is a completely dilapitated, falling apart, slumlord 2 unit right next door that has tenants that Are hit or miss. We had to bring one of the prior tenants to court In the past. The street I live on is 70% 2 unit rentals, which I hadn't realized until after I moved in and kills any chance for appreciation of the area.

    Like I said, there are no Trouble makers currently, and haven't been for about a year so my feeling is "sell while we can" as the crap 2 unit next door is vacant and when occupied is typically inhabited by "porch people".

    I owe a family member 50k@2% off the books on this house. We love the inside of our house and have done a lot of cosmetic work that makes it very homey, but the high amount of rentals on the street kills rent prices too. Id be lucky to get $750/mo for my house in rent. I have a gut feeling id be better off selling my house for 70-75k and move on. Id pay back the 50k owed, and use the 20-25k equity to completely pay the 21k into the "flip" i paid cash for (i have a comfortable cash cushion)and pay out of pocket for renovation (in cash), live there for 2 years, profit 50k and roll that (tax free) into a new home, with excellent schools, outside the city,where we really want to lI've. Is 2 years the minimum time to live there to roll profits tax free?

    If I did place a tenant in the flip temporarily, am I screwing myself for future tax rolling forward?

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