Investment property in NJ

15 Replies

I bought an investment property in NJ for 120k. The house will sell for 175k without putting a single dime into it. I don't have a mortgage on the home. What is the best way to avoid heavy taxation? Thanks in advance.

Originally posted by "SoldbyWentz":
I bought an investment property in NJ for 120k. The house will sell for 175k without putting a single dime into it. I don't have a mortgage on the home. What is the best way to avoid heavy taxation? Thanks in advance.

Live in it as your primary residence for 2 years out of 5 - this will avoid the entire tax. Or you can set up a 1031 exchange but I don't know if it is worth the hassle and cost for avoiding taxes on 55k (note you don't really avoid the taxes, but instead defer them).

As trant says, a 1031 is on option to defer them. You would need to hold the property for some period, probably a year plus.

If you're planing to just turn around and sell this quickly, its either short term capital gains or ordinary income. Both are taxed at your marginal rate. You can end up owing SET (self employment tax), too, depending on how you structure it. A good CPA would be a good investment.

Fundamentally, there's no legal way to avoid the taxes if you sell quickly. Its not an investment at all. Its "goods". What you pay is the COGS (cost of goods sold) and what get get is the revenue. You pay tax on the difference, less expenses. Doesn't matter if its houses or shoes.

Originally posted by "Wheatie":
As trant says, a 1031 is on option to defer them. You would need to hold the property for some period, probably a year plus.

I was unaware that a 1031 exchange had a requirements regarding holding time. Are you sure about this? Also, hypothetically -- if you purchase a property for rehab and about half-way through you get an offer on the property from an interested buyer for after the rehab is completed and you make the sale.

Is this something that will trigger SE tax? Keeping in mind that you have a history of rehabbing and holding properties.

1031 exchanges apply to investments. You can exchange one like-kind investment for another and defer the taxes. Flipping, whether wholesaling or fix and flipping, is not considered an investment. As I understand it, the time guidelines are vaguely stated, and one year is taken as a reasonable minimum.

I won't claim to fully understand exactly how to avoid the SET. I've read several discussions that say to put the properties into S-corps and handle the transaction in a specific way. Its not an issue for me right now, so I've not tried to figure out the details.

I have heard one guru claim you could avoid SET and dealer status even if you were doing quick flips if your INTENT was to hold long term. If you had some long term holdings, but also had a few quick flips, the claim was the flips were just to generate cash for the long term holds, therefore were not subject to SET and you're weren't subject dealer status.

Living in the house as my primary residence is not an option. I had heard from a local radio program something about taking out a mortgage on the home b/c you cannot be taxed on loans. For example, the house appraises at 200k I take out a loan for 85% LTV. Pay myself 50k out of that and then sell the property for 175k satisfy the mortgage. Does that make sense or would that not work?

No, it makes no sense. A loan won't have any effect on the taxes. A loan would just allow you to get some of the money now rather than waiting for a sale. You'll have to pay a bunch of closing costs.

The radio program was referring to the fact you don't pay taxes on loan proceeds. You will still pay exactly the same taxes when you sell.

If you're planning to sell it any time soon, you will have to pay taxes at least at your marginal rate. No way around that, short of the suggestions already offered. With some creative structuring you might avoid part of the SET.

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