Newbie Tax Flip question

[Jake Lippert]

Hey guys...long time listener first time poster. Here’s my problem. My wife and i bought a house in foreclosure at an auction with 100% intentions of moving in to it.  We bought the house for $250k. The house needed some TLC and we had planned on putting $75k into it and put off remodeling an additional $25k until 3-5 years down the road. Things have suddenly changed in our lives and now we’ve decided to sell it. So we are putting the additional $25k into it for a complete very unintentional flip to finish it out and sell it. At this point we will have $350k in it. I think we can sell $400k (low side) to $450k (high side). Afternoon closing cost of let’s say $15k we will net $35k-$85k. How will we be taxed on this gain and is there any tricks or tips you could recommend?  It’ll be roughly 6 months of owning when we decide to list. Thanks in advance. 

[Dave Foster]

@Jake Lippert, The biggest problem you've got is that your intent was "100% to move in".  That would have made the house your primary residence and after 2 years of living there you could have sold and taken the first $500K in profit tax free.

Since your intent wasn't to hold the property for productive use then it also doesn't qualify as investment property and the 1031 exchange.  That would have allowed you to sell and defer all tax into the next purchase. @Dave Toelkes is right that flips also don't qualify since your intent would be primarily to resell.  

I do like the accidental flip label.  If you did indeed intend to use this for productive use in investment then an accidental flip is sort of what you got.   Just remember that once is an accident twice is a pattern.

At this point there is really only two ways you can avoid paying the tax.

1. Move in for two years.

2. Put a rentor in and hold for a while and then 1031.