Tax Strategies for Flipping
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?
Originally posted by @Account Closed:
Originally posted by @JD Martin:Originally posted by @Natalie Kolodij:
Excellent, main point here being this: you can do anything you want until you get audited. Make sure you have good documentation and basis for anything you claim.
No.... there is something called the IRS code. It dictates what you do on matters pertaining to tax. Talks about 'doing anything you want until you get audited' is bad advise and irresponsible.
Obviously, you didn't get the "tongue-in-cheek" tone of the post.
Originally posted by @Steve Vaughan:
A sweet triplex was for sale and I passed. CB zoning so the county valued the land at about 40% of PP. No thanks. Condos interest me from a depreciation perspective. No land value at all!
I'm jumping back up the post a bit but in San Francisco the assess the land value for condos. Obviously our land values are a lot higher but even in a lower priced market condos usually own a percentage of the land correct?
@Andrew Chambers No, that's not right. As has been stated before, if you flip houses, houses are inventory just as if you were buying and selling widgets. If you buy-and-hold rental properties, the houses are property used in your trade or business. The results are the same regardless of whether acting as a sole proprietor or through an entity (although the taxation of the resulting income will vary depending upon the type of entity).
Based on what we just read above, Andrew is incorrect. Or, did I miss something?
Originally posted by @Linda Weygant:
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....
@Linda Weygant,
What if you are a married couple and you do live in flips every year and 1 day or 2 years? How does that come in to play for a tax advantage?
is it 6 in 1/2 , half a dozen in the other between the cost of refinancing and the tax on profit? I suppose that depends on the profit margin..
Originally posted by @Carolyn Morales:
Originally posted by @Linda Weygant: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....
@Linda Weygant,
What if you are a married couple and you do live in flips every year and 1 day or 2 years? How does that come in to play for a tax advantage?
You can use the personal residence capital gain exclusion every 2 years. One year doesn't buy you anything.
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CPA Colorado (#23225)
- Clue Business Services, Inc.
- Podcast Guest on Show #244
@Linda Weygant is that true in every state? 1 year and 1 day doesn't buy any tax credit? On a live in rehab?
Originally posted by @Carolyn Morales:
@Linda Weygant is that true in every state? 1 year and 1 day doesn't buy any tax credit? On a live in rehab?
This discussion is IRS rules for your federal tax return. State laws do not trump federal laws.
It's possible your state could have an exemption or a different tax treatment (I don't know of one and I prepare taxes in something like 28 states - but I allow for the fact that I don't have every state tax law memorized and there could be a state out there with this provision), which would affect the state tax return only, not the federal tax return.
But for the federal tax return, this discussion applies.
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CPA Colorado (#23225)
- Clue Business Services, Inc.
- Podcast Guest on Show #244
Yes, you are wrong. When your business is buying and selling real estate, the real estate is merchandise to your business. It is not property "used" in the course of your business and it is not property held for the production of income. Capital assets have a life of more than one year and qualify for capital gains tax rates when sold. Real property held for sale to customers is considered to have a life less than one year, and, as such, it is not a capital asset, but rather, a current asset called merchandise.
Makes no difference how long you hold merchandise before it is sold; profit on the sale of merchandise is always ordinary business income. Furthermore, when you sell a flip you bought last year, the IRS deems the acquisition date to be Jan 1 of the year of sale. On your tax return (Schedule C if flipping as a sole proprietor), the holding period for flip property is always less than one year, regardless of the actual purchase date.
I would say that most the comments here are from tax compliance professionals. I would seek out a tax planner and advisor. If you are paying ordinary treatment on a flip and you only do one a year then I would seriously look at your tax planning strategy.
This is a good place to start. Cordell D. Pool v. Commissioner of Internal Revenue, T.C. Memo 2014-3 (2014)
There is more than just intent to look at.
