First time flipper...

6 Replies

My fiance and I have twin boys and two other kids. We have a wonderful house of our own and we both have great jobs. Dan is the owner of a successful construction company and I am in marketing.
We bought this small house in Northern Iowa where we live. The house was a foreclosure wanted $20k and we got it for $12k - we did an analysis and breakdown - we are going to spend $13k in fixing this property up (labor and material... thank goodness this is what Dan does for a living!).
Here's where it gets tricky... The house is under my name - Dan is not in the papers at all. For tax purposes do I "hire" Dan's company to do the work and pay him or do we just do it and not include the construction company. Some of his guys will be doing some stuff like the roof, etc... I just need to know what's the best way to do this and come ahead for both me and my taxes and his company. This is going to be an ongoing investment, of flipping and/or renting houses and this is our biggest battle so far. We have a CPA but he explains things in a crazy manor "if" and "if". We can easily sell the house for $40k and I want to take the profit and put it right back into another flip - so should I do a 1031 exchange?
Thanks everyone! :wink:

The ownership issue depends on your tax pros advice. He isn’t on the deed now, but easily could be added

You are looking at a fairly small profit dollar wise, a 1031 exchange probably does not make sense in this case. There are fees involved with a 1031 exchange and the savings probably doesn’t justify it.

:cool:

Thanks for the suggestion on 1031, makes sense.

We are going to keep Dan and his company separated from our real estate investments - so what do you think?

If keeping his business separate fits your plans then there is nothing wrong with doing it that way.

:cool:

Hi Tami - I mildly disagree with Richard's answer that your transaction might not be worthy of an exchange, but be sure to see the info below, too. Anytime you can defer taxes, it's hard to see that as a bad thing. Costs for an exchange are minimal (my company charges a total of $695, for instance); it's hard to find a RE deal where taxes won't be at least that much.

However, there's some additional information about 1031 exchanges that is important for you to know. If your intention when you bought the property was to fix it up and flip it, and it appears that it was, the property is not eligible for an exchange. Exchange property must be property that was purchased and held as an investment or used in a business. Property that was purchased to resell is considered inventory in your business, aka dealer property.

If you ended up holding it and renting it out for a period of time, you should be able to exchange out of it and into another property. At that point, it would have turned into a property that you had held for investment.

Best wishes for great success in your investing!
Ken Tharp

Hi Ken,
Thanks for your words of wisdom. I will check out the website you mentioned. West DM is great - I am pretty familiar with the DM area, I have a lot of friends in the radio business down there (Clear Channel).
I am in the Mason City area.

Hi Tami,

Yes, I noticed you were in Mason City. I've been up your way a couple of times in the last year or so. In addition, my son graduated from Luther College last May, so we've made many trips past MC & CL over the last four years!

Today was my first day here at biggerpockets, and I got called out for posting my web site in the message. I didn't realize that I wasn't supposed to do that, but obviously I will cease that immediately!

I listen to a lot of Clear Channel radio, but I suppose anyone who has a radio can say that!

If I can answer any questions for you about 1031s or any aspect of investing, please feel free to call anytime. In addition to operating my exchange business, I've been an investor for almost 30 years now.

Best wishes to you and your fiance,
Ken

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