Me and my partners will be selling our first flip next week and we are trying to see how bad the capital gains tax will be for each of us. There are 3 of us in on the deal; Me, my brother, and our partner(Brendan). We are splitting the profit evenly 3 ways. My name and Brendan's name are on the mortgage and equity. My brother doesn't have his name on it at all. We have owned the property for 3 years, but my partner only used it as his primary residence for 6 months, I used it as my primary residence for more than 2 years, and my brother never used it for his primary at all. I've read that I should be fine it capital gains because its been more than 2 years for me, but how bad will it be for my brother and Brendan? Will they both get hit with long-term capital gains for around 15%?
How is this a "flip" if you owned it for 3 years, and lived there for 2 of them? It sounds to me like a personal property.
Sounds to me like you're going to need to get some expert tax advice on this one. I'm not sure if or how you would be looked at taking the 121 exclusion for personal property.
Flip income in never treated as capital gain, it is always taxed at ordinary income rates. So at the worst you would be taxed at your marginal earned income rate whatever that might be.
It will very likely depend greatly on how the three of you have been treating the taxes for the last several years since that will establish what the property's "use" was during that time. And you or all of you may need to file amended returns to correct past reporting to what it should have been in order to be taxed appropriately on the sale.
We bought it with the intentions of holding it and fixing over time. Being our for project and doing all the work ourselves and working full time, it did take a little longer than we expected.
You need a CPA. I don't think you can use the 121exclusion, when you only had a part ownership.
From what I understand, intentions aside, it did end up being your personal property. It apparently was never used for any business purposes. So, for your 1/3 share, no capital gains. For the other two guys, they will have long-term capital gain on their respective 1/3 of profit. The tax rate is 15%, and possibly less or even zero, depending on their overall income.
I knew I would be okay, but I kind of feel bad now. But being our first deal, this is one thing we all overlooked. I'm sure we will work things out. Thanks for your input.
If it really was a flip, i.e. property bought, fixed and resold - you would have been taxed much harsher: regular income tax + self-employment tax. This can amount to as high as 40%, but in any case more than 15%. I recommend my clients to set aside 1/3 of the profits from each flip for taxes.
Can the profit from flip be used towards other property purchase with 1031 clause to reduce tax
No, it cannot. 1031 exchange is only for investment properties, which pretty much means rentals. Flips cannot be used in a 1031 exchange.
I'll keep in mind for future flips to designate a certain amount of the profit for capital gains, thanks for the info.
They are going to shorten the next flip down to 2 year 6months.....sorry just a joke
Geez I hope not, now that we understand the process, we are ready to put systems in place for quicker turn around times and we are probably gonna search for some multi-families now.
A technical, but important, correction: the very term capital gains does not apply to flips. Flips have ordinary business income, which has very different rules from capital gains and is taxed much higher.
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