What to do with gains from rehab/flip

Question

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.

Ashish Acharya · Answer

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.

Michael Plaks · Answer

@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.

Sean O'Keefe · Answer

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

Chris Seveney · Answer

@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.

Diana Barrett · Answer

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.

Oscar Meneses · Answer

I understand. Thanks Michael

Oscar Meneses · Answer

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.

Tyler Burlison · Answer

Thanks, everyone. I appreciate all of your insight!

Tyler Burlison · Answer

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

What to do with gains from rehab/flip

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