What to do with gains from rehab/flip

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Tax, SDIRAs & Cost Segregation
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What to do with gains from rehab/flip

Tyler Burlison
Member since 2020 · 7 posts · 2 votes

Hi everyone,

From what I understand about short-term real estate gains, a way to avoid them is to buy another and do a 1031. Are there other ways to shelter the gains from tax? The amount will be between $30-40k in gains. Would it be possible to open a self-directed IRA for funding deals in the future and not have to pay taxes if I put it in an IRA, assuming I could put the entire amount in it? Just wondering if there are any other options besides having to buy another property.

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
2y
Quote from @Tyler Burlison:

Hi everyone,

From what I understand about short-term real estate gains, a way to avoid them is to buy another and do a 1031. Are there other ways to shelter the gains from tax? The amount will be between $30-40k in gains. Would it be possible to open a self-directed IRA for funding deals in the future and not have to pay taxes if I put it in an IRA, assuming I could put the entire amount in it? Just wondering if there are any other options besides having to buy another property.


Tyler, the profit from flips doesn't qualify for 1031s. Only capital gain qualifies for the 1031 exchange. 

There are many individual and business limitations to putting money into an IRA. No, you cannot put the entire amount.

The best way to save taxes would be selecting the right entity, finding the right kind of retirement account, using depreciation form rentals to offset your income, and such. 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Tyler Burlison

    You can do a 1031 but for 30-40k I would rather pay taxes on it now as tax rates will only go up not down.

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    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    2y
    Quote from @Tyler Burlison:

    Hi everyone,

    From what I understand about short-term real estate gains, a way to avoid them is to buy another and do a 1031. Are there other ways to shelter the gains from tax? The amount will be between $30-40k in gains. Would it be possible to open a self-directed IRA for funding deals in the future and not have to pay taxes if I put it in an IRA, assuming I could put the entire amount in it? Just wondering if there are any other options besides having to buy another property.


    Tyler, the profit from flips doesn't qualify for 1031s. Only capital gain qualifies for the 1031 exchange. 

    There are many individual and business limitations to putting money into an IRA. No, you cannot put the entire amount.

    The best way to save taxes would be selecting the right entity, finding the right kind of retirement account, using depreciation form rentals to offset your income, and such. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
    4Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y

    @Tyler Burlison

    No such thing as "short-term real estate gains." You either have flips or rentals. Capital gains, both long-term or short-term, apply ONLY to rentals, not to flips. Same for any tax strategy that deals with capital gains, including installment sales and 1031 exchanges: they apply to rentals, not to flips.

    Despite the fact that you cannot put the entire amount into a retirement account, what would be the point of it even if you could? You're doing flips to either generate spendable income or to generate capital for further investments. Locking up your profits in a retirement account would be the opposite of it. (Yes, there're self-directed retirement accounts, but it's a different conversation.)

    Bottom line: flipping business is highly taxed, and there're limited ways to reduce these taxes, and practically no way to eliminate it completely. 

    3Reply
  • Sean O'KeefePro Member
    CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes
    2y

    You can't do 1031 exchange on a flip. It needs to be a rental. 

    [email protected]628-241-0888
    2Reply
  • Diana Barrett
    Member since 2024 · 4 posts · 2 votes
    2y

    ashish, if i am looking for a CPA, is it wise to go outside my primary state, or find an investor friendly in my home state. tku.

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Diana Barrett:

    ashish, if i am looking for a CPA, is it wise to go outside my primary state, or find an investor friendly in my home state. tku.

    If you can find a local one, it is often better if your state has state taxation. Each state has its own quirks, and local CPAs should know it better, at least in theory.

    But it's never a guarantee. I have corrected CA state returns prepared by CA CPAs, CO state returns prepared by CO CPAs, and WI state returns prepared by WI CPAs. 

    Tax professionals who contribute to this forum are all real estate specialists and work nationwide, so you have plenty to choose from if you don't choose someone local.

    0Reply
  • Diana Barrett
    Member since 2024 · 4 posts · 2 votes
    2y

    thanks Mike

    0Reply
  • Tyler Burlison
    OP
    Member since 2020 · 7 posts · 2 votes
    2y
    Quote from @Michael Plaks:

    @Tyler Burlison

    No such thing as "short-term real estate gains." You either have flips or rentals. Capital gains, both long-term or short-term, apply ONLY to rentals, not to flips. Same for any tax strategy that deals with capital gains, including installment sales and 1031 exchanges: they apply to rentals, not to flips.

    Despite the fact that you cannot put the entire amount into a retirement account, what would be the point of it even if you could? You're doing flips to either generate spendable income or to generate capital for further investments. Locking up your profits in a retirement account would be the opposite of it. (Yes, there're self-directed retirement accounts, but it's a different conversation.)

    Bottom line: flipping business is highly taxed, and there're limited ways to reduce these taxes, and practically no way to eliminate it completely. 


    Thanks Michael. Yes, I was referring to self-directed IRA possibilities.

    0Reply
  • Tyler Burlison
    OP
    Member since 2020 · 7 posts · 2 votes
    2y

    Thanks, everyone. I appreciate all of your insight!

    0Reply
  • Oscar Meneses
    Investor · Miami · Member since 2023 · 18 posts · 18 votes
    2y
    Quote from @Michael Plaks:

    @Tyler Burlison

    No such thing as "short-term real estate gains." You either have flips or rentals. Capital gains, both long-term or short-term, apply ONLY to rentals, not to flips. Same for any tax strategy that deals with capital gains, including installment sales and 1031 exchanges: they apply to rentals, not to flips.

    Despite the fact that you cannot put the entire amount into a retirement account, what would be the point of it even if you could? You're doing flips to either generate spendable income or to generate capital for further investments. Locking up your profits in a retirement account would be the opposite of it. (Yes, there're self-directed retirement accounts, but it's a different conversation.)

    Bottom line: flipping business is highly taxed, and there're limited ways to reduce these taxes, and practically no way to eliminate it completely. 


    Thanks for the info Michael. I am in a similar situation. I am an out of country investor and opened an LLC to purchase my first property (Cleveland OH area). It is currently in the rehab stage and I plan to list it for sale in about a month. I am hoping to generate about $40k in profit. Can you tell me the basics about the taxes I will be subject to or an aproximate % I will have to pay? I know I need to start looking into this and planning in more detail.

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Oscar Meneses:

    Thanks for the info Michael. I am in a similar situation. I am an out of country investor 

    Thank you for asking.  Unfortunately I cannot help because I do not practice in International taxation. It is a separate area of tax law, and it is also country-specific. 

    There are some of my colleagues on this forum who do work with International clients. The trick is that we are not allowed to offer our services to you, publicly or privately, so you have to find these people on your own and initiate the contact.
    0Reply
  • Oscar Meneses
    Investor · Miami · Member since 2023 · 18 posts · 18 votes
    2y
    Quote from @Michael Plaks:
    Quote from @Oscar Meneses:

    Thanks for the info Michael. I am in a similar situation. I am an out of country investor 

    Thank you for asking.  Unfortunately I cannot help because I do not practice in International taxation. It is a separate area of tax law, and it is also country-specific. 

    There are some of my colleagues on this forum who do work with International clients. The trick is that we are not allowed to offer our services to you, publicly or privately, so you have to find these people on your own and initiate the contact.

     I understand. Thanks Michael

    0Reply
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