Tax Strategies for Flipping

Investor · Brevard, NC · Member since 2017 · 54 posts · 8 votes

I will be selling a flip in a few months and will be very close to the 1 year hold mark on the property.

Other than dumping more money into the property in order to increase the amount of write-offs, does anyone have any tips or strategies they have used to soften the tax hit on their flips?

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Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

I'm not sure why you're wrapped around the axle about the 1 year mark. That makes no difference on a flip. (If you're thinking flipping income is Capital Gains, it's not. Flipping is Ordinary Income).

Many people find an S-Corp valuable for tax savings for flipping, however you would have needed to set that up at the beginning of this transaction, not at the end, so this is not a strategy that will work for you this time around.

My best advice would be to get with a real estate savvy CPA and explain your experience, your goals and what you've got going on in the rest of your life, because all of that will matter in the advice you get for your future projects.

For this project - sounds like the time to think about this was a year ago....

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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
I'm not sure why you're wrapped around the axle about the 1 year mark. That makes no difference on a flip. (If you're thinking flipping income is Capital Gains, it's not. Flipping is Ordinary Income).
Many people find an S-Corp valuable for tax savings for flipping, however you would have needed to set that up at the beginning of this transaction, not at the end, so this is not a strategy that will work for you this time around.
My best advice would be to get with a real estate savvy CPA and explain your experience, your goals and what you've got going on in the rest of your life, because all of that will matter in the advice you get for your future projects.
For this project - sounds like the time to think about this was a year ago....
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John Cushing
Investor · Patchogue, NY · Member since 2017 · 69 posts · 11 votes
9y
Linda Weygant the profit from the flip isn't tax as capital gains? What rate is it taxed at?
2 Reply
Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
9y
Jackson,
Simple not complicated answer is:
Property acquired to flip is considered as an inventory and unfortunately holding it more than one year has no significance. Your gain will still be taxed as ordinary income at your marginal rate.
If you like the house you intend to flip, better way to save money on tax is to hold it and then refinance it after the seasoning period to take your cash out. That way you still get your cash back, you will eventually build an equity, and save taxes on the profit if you had flipped.
If you need money right away or your strategy is not to hold, than you gotta pay taxes on the gain.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
9y
Originally posted by @John Cushing:
Linda Weygant the profit from the flip isn't tax as capital gains? What rate is it taxed at
It is taxed at your marginal rate. Explained below:
For e.g. If your had $75k of income in 2016, your flip profit would be addition to 75k (married) and would be taxed at 25% (or more if your made significant gain on the flip and your total income was 151k plus)
Tax rate Single Married, filing jointly
10% $0 to $9,275 $0 to $18,550
15% $9,276 to $37,650 $18,550 to $75,300
25% $37,650 to $91,150 $75,300 to $151,900
28% $91,150 to $190,150 $151,900 to $231,450
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Jackson TatePro Member
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Investor · Brevard, NC · Member since 2017 · 54 posts · 8 votes
9y
@Linda Weygant
My current CPA has been harping on the whole 1 year mark because he says that this WOULD be considered capital gains.
When my parents have sold investment property in the past it has had capital gains implications as well.
So according to you, my current CPA is wrong?
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
@John Cushing - as others have said, it's taxed at your marginal rate. So you add up all of your earned income and apply the rates that @Ashish Acharya indicated above to your total taxable income.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
9y
Originally posted by @Jackson Tate:
@Linda Weygant
My current CPA has been harping on the whole 1 year mark because he says that this WOULD be considered capital gains.
When my parents have sold investment property in the past it has had capital gains implications as well.
So according to you, my current CPA is wrong?
Investment properties ( buy and hold) are considered property used in trade and business and sale of those properties are Section 1231 transactions and qualify for capital gain rate. Flips are not investment properties, they are inventories for the seller, just like Milk is an inventory for Walmart. Can not qualify for capital gains on those.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Yep, flipping's just a job at high ordinary income tax rates. You will pay whatever rate your profit bumps you up to.
Wait until you see that your realtor made as much as you did without the risk, the late nights, weekends or indigestion!
This year I am selling 2 'flips'. One, tomorrow, I bought in '06. Rehabbed enough to get rented for 11 years then really fixed it up to sell this spring. I will pay long-term cap gain only, but am still selling a spiffed out empty house at full retail.
Tax prep is a long game like Linda mentions. I run active income activity through an s-corp, but own no RE inside it. You might look into an LLC taxed as an s-corp if you flip again, John.
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Jackson TatePro Member
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Investor · Brevard, NC · Member since 2017 · 54 posts · 8 votes
9y
@Ashish Acharya Thanks for all the info and not making it complicated. It appears I need a new CPA.
@Steve Vaughan So you will pay 15% tax on the one you are selling tomorrow?
1 Reply
Mike Flora
Investor · Menifee, CA · Member since 2015 · 534 posts · 216 votes
9y
Have you ever tried to rent the property out at all over this year? If you have tried to rent it out and you sell it you might be able to 1031 exchange it and defer the taxes. Just a thought if your dead set on not paying taxes and want to pick up a rental. Not sure how much equity over a year you gained on your property. I have an LLC and with all our write offs we figure about 20% of our profit to taxes. Pretty safe number for us.
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Mike Flora
Investor · Menifee, CA · Member since 2015 · 534 posts · 216 votes
9y
20% of each flip profit we figure. Just to be clear
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Jackson TatePro Member
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Investor · Brevard, NC · Member since 2017 · 54 posts · 8 votes
9y
@Mike Flora No, I have not tried renting it out to this point as it was unrentable. My goal was to sell it and use the proceeds to eliminate my remaining bad debt. You say you figure 20% tax....is that with being in the 25% tax bracket?
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Originally posted by @Jackson Tate:

@Ashish Acharya Thanks for all the info and not making it complicated. It appears I need a new CPA.
@Steve Vaughan So you will pay 15% tax on the one you are selling tomorrow?
Correct. I'm below the healthcare 3.8% thing. My effective tax rate has been negative for 14 years.
Someone please clarify- if you're annual income is above $x, cap gains are 15% + x%.
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Mike Flora
Investor · Menifee, CA · Member since 2015 · 534 posts · 216 votes
9y
What you should be putting aside is up to you and your CPA. That's just for me and my taxes here in California. Just figure a high amount and be happy when it's not that high in the end.
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Taylor Brugna
CPA · New York, NY · Member since 2016 · 203 posts · 132 votes
9y
Steve Vaughan The strategy you describe is my favorite for investors that aren't churning out a high volume of flips. Hold as a rental for a couple of years, the tax savings can be significant! The capital gains rate jumps to 20% for investors in the 39.6% bracket.
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John Cushing
Investor · Patchogue, NY · Member since 2017 · 69 posts · 11 votes
9y
Thanks Ashish Acharya and Linda Weygant
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Linda Weygant, "Wrapped around the axle?????" - Love it!! You are awesome and right as always!
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Scott Hesseltine
Louisville, KY · Member since 2017 · 9 posts · 5 votes
9y
If you were brand new and just getting into investing, goal is to start with a few flips and then get into a brrr strategy what would be the recommended structure for the business in order to minimize tax impacts?
2 Reply
Ravi P.
Investor · Schaumburg, IL · Member since 2015 · 219 posts · 104 votes
9y
@Jackson Tate in order for you to determine how your property will be taxed on the sale will primarily based on your intent when aquiring the property. To my knowledge the IRS does not have a required holding period for rental properties. A common misconception is that investors are require to hold a property for atleast one year, not true. It is strictly a recommendation. This one year holding period is required to determine between LT and ST holdings for stocks. This is probably why many in the tax world use this 1 year holding period. But in your case you say it is a flip, so you would be considered a dealer and have no right to qualify for the tax deferment, regardless of holding period.If your intentions were to Buy and Hold, then it would be a different story. Hope this clairify like-kind exchange holding periods.
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Account Closed
Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
9y
Originally posted by @Jackson Tate:

I will be selling a flip in a few months and will be very close to the 1 year hold mark on the property.
Other than dumping more money into the property in order to increase the amount of write-offs, does anyone have any tips or strategies they have used to soften the tax hit on their flips?
How was the flip financed? Unless there are no borrowed funds involved, the plan with flips typically is to complete the rehab and sale of the property ASAP -- to limit any holding cost or chance of there being a price decline in the housing market.There would have to be an incredibly good reason to hold a flip for a year.
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Jarrod Williams
Investor · Lexington, KY · Member since 2015 · 26 posts · 5 votes
9y
@Steve Vaughan: I keep hearing about this. I think I understand but I want to make sure I have it all ironed out right. Would you mind helping me with your specifics?
So your "effective tax rate" has been negative for 14 years. Let me take a stab at what I think this means and where I am getting lost. You have some sort of business entity (LLC, S-corp, whatever) that you do your real estate through. You have a large portfolio of hold properties in that. Those hold properties have expenses, mortgage interest, amortization of points from loans, and depreciation all of which you can use to lower the taxable income from your properties. Allow me to use an example with numbers because it will help show where I am confused.
You are 3 years in to real estate investing. You bought 1 property a year for 3 years at $100,000, you put 20% down each time, interest was 5% every time on a 30 year note, you paid 2 points to originate each loan, each property rents for $1000 a month ($1200 gross rent/year/property), 10% loss for maintenance/vacancy, insurance $500 per, property tax $1000/year, no utilities. Assuming every purchase happened on Jan 1st each year.
Year 1: NOI - $9300 = (12000*0.9 - 1000 - 500);
mortgage interest paid = $3315.12
amortization from points = $160 = (80000*0.02)/10
depreciation of property = $3636.36 = 100000/27.5
taxable income = $2188.52 = 9300 - 3315.12 - 160 - 3636.36
Year 2: NOI - $18600 = (12000*0.9 - 1000 - 500)2
same order as above - $6588.63, $320, $7272.72
taxable income = $4418.65
Year 3: NOI - $27900 = (12000*0.9 - 1000 - 500)3
same order as above - $9818.81, $480, $10909.08
taxable income = $6692.11
So the only way I see to carry a negative tax balance is to spend the taxable income in expenses or capital improvements. So if you added a bathroom or something to all the properties for 10K a year to push appreciation you would have a loss. Now your properties are all worth 125K a piece. You wrap them all into a refinance to realize the appreciation and use that money to buy another property. Is this how you carry a negative "effective tax rate" and still have cash to grow your business? What am I missing or have incorrect? Thanks.
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Jackson TatePro Member
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Investor · Brevard, NC · Member since 2017 · 54 posts · 8 votes
9y
@Account Closed
The flip was financed through a conventional with rehab included. The reason I still have it is because there was an unforeseen issue with installing a septic system that required purchasing a contiguous property which I just closed on last week.
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Mel C.
Flipper/Rehabber · Middlesex County, NJ · Member since 2017 · 29 posts · 8 votes
9y
holy crap, all this time I thought that I would only be taxed capital gains if I held on to my flip for a year and a day...dang it, I really need to talk to an accountant!
1 Reply
Andrew Chambers
Decatur, GA · Member since 2017 · 3 posts · 1 vote
9y
Correct me if I'm wrong, but property is property right? Whether you are buying and holding or flipping a house, at no point is it considered inventory. I know in accounting there is a separation between inventory and property, plant, and equipment. I'm not sure if this is relevant or not. Also, wouldn't it depend on whether the person is buying and selling as an individual or a business.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
9y
@Andrew Chambers
This is wrong.
The IRS looks at you flipping houses the same as running any other business.
If store buys something that it will either then immediately resell, or process further and re-sell it's inventory.
As far as the IRS is concerned you're doing the exact same thing. Buying a house as inventory for your business...it's something you now own with intent to resell right? That's inventory.
And no- Whether it's in your name or a business name does't matter. If your intent is to buy/sell a house for profit it's inventory and your sales are subject to SE tax at your normal tax rate
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Tax rate	Single	Married, filing jointly
10%	$0 to $9,275	$0 to $18,550
15%	$9,276 to $37,650	$18,550 to $75,300
25%	$37,650 to $91,150	$75,300 to $151,900
28%	$91,150 to $190,150	$151,900 to $231,450

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