I am flipping a house in Milwaukee, WI and am trying to figure out the best strategy for cashing out. From what I can gather, I have 3 options. Sell the house right away, rent it for awhile then sell it, or do some type of lease option or rent to own. Tax-wise, the immediate sale seems like it would be taxed the most.(but I would get the money back quicker) Any benefits to do a rent to own over just renting? How long should I hold it before selling? For example purchases, I bought the house for $60k, rehab will be $25k and I plan on selling it around $120k.
Well, way back when I was in college, I did get my bachelor's in accounting and could've been a CPA (graduated in 98, just before they raised the CPA education req to 150 credits in WI and I think many other states) but soon decided public accounting work wasn't my bag and ended up after a long and winding journey in the RE investing biz, which I really enjoy, for the most part. I do remember a few relevant points, although I know we have several BP members far more well versed on this subject than I am, so I'll stick to what I'm pretty sure on here.
First off, much of what you're asking are questions that either I or a much more qualified practicing CPA would likely have different answers on, depending on many other factors involving YOU and what your goals are, other income and assets you have, etc, etc so I'd HIGHLY recommend that you get with a local CPA and do some work on figuring how this fits into your overall financial picture now as well as plans for the future. Yes, it will cost some money, but I can almost guarantee you 100% that it will be money very well spent! If you need to find a CPA who's well versed on the RE investing end of things, I'd say check with the WICPA first for possible candidates.
Also, I'd highly recommend you read up on "active vs passive investing", in fact I'd say to throw "real estate" into that search term as well, so your search will return articles specifically relating to real estate investing. Yes, on the one hand you'd think your flip project would fall under cap gains rules (thus if held for less than a year it is taxed at your normal rate based on your adjusted gross income or if held for over 1 year it falls under the much lower cap gains rates, assuming you have a fairly high income otherwise) BUT if its considered an active investment then it can well be considered income just like from any job, as far as the IRS is concerned.
Of course, anyone can claim whatever they'd like to on their tax return, but when the IRS catches someone not playing by their rules the penalties can be severe and that fact, combined with the fact that our current US tax code is both massive as well as often ambiguous leads me to very much recommend that you talk to a practicing CPA who knows the rules and preferably one who's very well versed on real estate investing in particular!
Good luck on your project too!
@Nathan Schoenborn What would you like to do? Do you want you money back to do another flip or would you rather sit back and enjoy the passive income that comes from selling on terms or financing?
A third option might be to put a tenant in the property and then sell it as a loaded rental to an investor that wants passive income. First decide what your ideal outcome is, then figure out how to structure that.
@Robert Taylor Thank you, that was the exact kind of answer I was looking for. Yes, I realize the sooner I cash out, the more I pay. What I wanted to know was, what opportunities are out there to structure it differently? I will definitely be looking into active vs passive investing right away, thank you.
@Bob E. You're right, I need to decide what outcome I want before decided which route to take. Ideally, I would just like 3(or more) sets of numbers in front of me so I can objectively review my options. But knowing what I want will definitely make the decision MUCH easier.
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