Investor · Aurora, IL · Member since 2014 · 31 posts · 5 votes
I bought a home in April 2015 and rehabbed it. I put it up on the market for sale and rent at the same time.
I have an interested couple in renting the townhome for a 6 month lease. So that would give the home back to us for selling in the summer.
My question is should I sell now ( subject to short term capital gains, self employment taxes) or rent out and sell after the one year hold ( subject to long term capital gains) ?
Also what is the long term capital gains for real estate? Are there other tax considerations?
Jorge
15% capital gain tax on long term (>12 mo) holds unless you are in the highest tax bracket at which point the tax will be 20%. Don't forget to factor in state tax.
You need to get with a CPA so that you can structure the deal in such a way that you demonstrate investment intent. A rehabbed property that you are intending to resell is not a property held for investment intent. The way you've laid out the facts currently, it can go either way but the IRS will say it's a flip vs an investment which will subject you to ordinary income and self employment tax. It's also important to note that you can "hold" a flip for several years and if you fail to demonstrate investment intent, it will still be subject to ordinary income and self employment tax rather than long term capital gains.
15% capital gain tax on long term (>12 mo) holds unless you are in the highest tax bracket at which point the tax will be 20%. Don't forget to factor in state tax.
You need to get with a CPA so that you can structure the deal in such a way that you demonstrate investment intent. A rehabbed property that you are intending to resell is not a property held for investment intent. The way you've laid out the facts currently, it can go either way but the IRS will say it's a flip vs an investment which will subject you to ordinary income and self employment tax. It's also important to note that you can "hold" a flip for several years and if you fail to demonstrate investment intent, it will still be subject to ordinary income and self employment tax rather than long term capital gains.
@Brandon Hall has given you some good insight into your issue and I think you should also consider the impact of renting the house out. Renters never treat a place as well as you would treat it and freshly rehabbed properties will not show nearly as well after a rent has been in place. Unless you are looking to add this property to your rental portfolio, I would sell it without an interim solution.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
There aren't many or any tax advantages to RE unless you own it for 366 days. Less than that, you may as well operate as a flipper of cars or a wholesaler of merchandise. Holding it longer than a year is what I always strive for. Good question!
Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
10y
There's a huge difference in the tax rates for a st flip, esp. when you include 15.x% self-employment tax, vs. cap. gains tax (15%, could be up to 20% if you have a very high income). I have a flip w/ a lot of unearned gain in it, and am happy to be leasing it for (at least) a year to get cap gains tax treatment.