Trying to figure out taxes on my first flip. Capital gains or no?

Question

Hi, I purchased a house in Rockland Ma last May 27th 2016. It is a flip, and i'm getting ready to put it on the market. I am trying to figure out what I will owe for taxes. I'm looking to be creative and maximize my return without " crossing the line" so to speak. Based on what I read, half the articles say a flip doesn't qualify for capital gains, while the other half says " well you kind of do". Anyone have thoughts or ideas on this? Here are my numbers. Purchase price 200k cash. Repairs 70k, selling price 349-359ish. Ive read about 1031 exchange etc, not sure if I qualify for that either.

Another question I have ,who would i hire to do my taxes. I know a tax guy makes sense but I feel like the tax guy I use is not creative, and lacks savvy. Would I get a tax guy who specializes in real estate, tax lawyer? Ok thank you for your time.

Natalie Kolodij · Answer

Well for starters- your tax professional need not have male genitalia.

If you're flipping as business it's ordinary income. Not capital gains. Taxed at your normal bracket.

1031 is more for investment properties but you may be able to get creative if it makes sense to utilize one 90k is a decent amount of profit. You could talk with @Dave Foster there may be a way to utilize it as a short term rental type of thing first- you have owned it quite a while.

But ya- you should absolutely find a tax professional (preferably one licensed with letters on their names) who specializes in real estate.

Account Closed · Answer

Congratulations, looks like a good deal.

You do not qualify for a Section 1031 Exchange because the property is not "held for productive use in a trade or business or for investment."

Your profit will be treated as Capital Gains.

But it will be Short Term Capital Gains instead of Long Term Capital Gains because you owned the property for less than one year and a day.

You will report the transaction on Schedule D, Capital Gains and Losses, and not on Schedule C, Business Income, because buying and selling one house does not make you a dealer.

That means that you will not be subject to Self Employment taxes.

The tax rate that you will pay on Short Term Capital Gains will be the same as your ordinary income tax rate.

I hope this helps.

Good Luck.

Michael Lantrip

Linda Weygant · Answer

@Natalie Kolodij hits the nail on the head on pretty much every aspect of her post.

Your flip is ordinary income, not capital gains.  Depending on other factors in your life, you may also be subject to Self Employment tax on this.

Dave Foster · Answer

STOP IT @Natalie Kolodij.  You just made me spew my drink laughing so hard!  And I have nothing to add to your comment!

@Robert Anderson, The reason why's it so fuzzy on the 1031 and capital gains vs ordinary income is because it's so fuzzy.  It all comes down to your intent.  If your intent was to hold the property for productive use in business for trade or for investment then you could do a 1031 and you could get capital gains treatment if the closing of the sale crossed over that 5/27 date.  Intent is what is in your thoughts.  But intent is something you should be able to demonstrate.

In your case you kind of nipped that when your first statement was the the property was a "flip".  Your intent in purchasing the property was primarily to resell it.  So, no 1031 and you'll pay ordinary income on the gain.  Think about changing your model to a buy, fix, rent, and then evaluate model.  Keeping your options open is a great way to not only maximize your portfolio but also to garner some added tax relief when appropriate.

David Benton · Answer

I'm not a CPA so this should be verified with your tax professional.

Short term capital gain if held less than 1 year at 25% or more up to 39.8% depending on your tax bracket. If held for more than a year long term capital gain at 15% unless you're in a higher tax bracket then 20% plus another 3.8% max on top of that. The advantage of claiming a Capital Gain is no Self Employment Tax added (15.3% more).

When starting out it's not so critical that you have a Real Estate Specific CPA. As wealth increases and all the transactions become more complex it becomes more important to have someone very good and knowledgeable on your tax team. The more experienced CPA is going to cost you more $ but by the time you get there you won't be concerned with the added expense as they will be saving you more $.

Trying to figure out taxes on my first flip. Capital gains or no?

Most Popular Reply