1031 Exchange / Taxes

3 Replies

Bigger Pockets family,

I bought a piece of lakefront property for $30,000 a little over a year ago. We planned to build on it. Got engineered prints, cleared the land then decided that we didn’t want to move their because we wanted to keep our home that has more land. We just sold it for $70,000. I’m the realtor so we get to keep all of the selling amount besides the 1% Broker fee I pay. I also have a contractors license and a Construction company. We want to start flipping houses. How can I use this money towards our flipping endeavors without getting hit with a lot of taxes?

Could we do a 1031 with this property money if we did a rental instead of a flip?

I would rather flip but I know we need to watch out for Uncle Sam. 

Any help would be much appreciated! 

@Kelly Ellis

Do the rental with the 1031 if it is worth it. Flipping is a business. 

At most you have $40k profit -long term capital gains at approx 20% tax is $8k - most likely worst case tax. 

There are some great 1031 peeps in BP community that may have something else -so wait for them to chime in. 

@Kelly Ellis

@Carl Fischer is correct. 

The gain you already had is taxable. It will be a capital gain.  Make sure you are managing your cash flow to set aside the capital gain that you need to pay IRS on this $40k gain. It was painful to see so many people not prepared for taxes this year. 

If you invest this money in the flips, you will owe bigger taxes compared to rentals activity. 

Flips are taxes are ordinary income in the same year, but rental is not taxed because you are not selling rental each year for profit. and eventually, when you sell, it will have capital gain treatment. Or defer it with 1031. 

However, fear of taxes on the flips should not keep you from flipping. It all depends on your RE inv goals. 

You will make more money with flips than rentals if done correctly each year. Rental is more of long-term wealth building. 

I have mostly noticed successful investor buys 1 rental for every 4/5 flips. 

With that strategy, rentals loss will actually help you shelter you flips profits. You need a good CPA. Good Luck.  

@Kelly Ellis , Every deal is going to speak for itself.  As @Ashish Acharya said most experienced investors do both a mixture of buy and hold and flips because theres synergy in the tax, income, velocity and scale that each type of investing brings to the table.

It sounds like you've already closed this sale.  That's too bad because your length of time held could have made this one an easy 1031 candidate as @?Carl Fischer said.  But you have to have the exchange in place prior to the closing of the sale.

So you're out $6 - $8K tax bill.  But this could be a good opportunity to take your time and use part of the proceeds to get into your first rental and buy a potential flip property at the same time.  Managing cash flow is key.  And turning flips or refi on buy and holds can both be your friend.  It just depends.