How to offset capital gains from a flip

22 Replies

I don't normally seem to make money, so I don't have this unusual problem :)

I am expecting a gain of about $50k this year from a flip deal. I have 15 rentals and I will probably depreciate them all, and take any other normal deductions, but I'm looking for some creative ways to lessen the gain.

Some ideas that come to mind are (not sure if all possible).. Buy a business vehicle, buy a seller financed house with an inflated sales price for depreciation, do all my deferred maintenance this year, donate to a non profit that I control, bury my profits in the ground and run from the IRS.... :)

money from a flip is not a capital gain, its taxed as ordinary income

If I had that problem, this would be my list:

Nikon DSLR, and a new piece of expensive glass to go with it.
Wacom Cintiq
Apple MacBookPro
Contractor Rack for Truck (Pace Edwards)
Full Metal JackRabbit (Pace Edwards) for truck
Drive around Bucket

or just buy another rental :D

Hrmm, im not sure buying another rental would offset the gain, but I do like that idea about getting a new laptop :)

I'm for the bobcat! Hear they need lots of maintenance, though.

Short of buying a lot of assets that you can expense, there will be very little you can do to offset the ordinary income. Take advantage of the Sec 179 deduction. What type of entity are you using?

Depending upon your other income sources, there are a few things to consider.

Depending upon your personal income, maybe contributing the property to a C Corp and using that lower tax rate may be beneficial. You could then recognize NO gain on the property as it is your basis in the Corp. You will then use the proceeds within the corp to distribute it slowly or use it to purchase more. All of this depends upon the specific situation.

-Steven the Tax Guy.

Why are you trying to minimize taxes? Income is GOOD. The goal should be maximum after-tax income, not minimum taxes.

If there is some planning that makes sense in the course of your ordinary business then take advantage of it. Don't bite of your nose to spite your face though.

Steven, the flip is in an s-corp

Bryan, I think we are talking about the same thing.

If your AGI is under $100k and the rentals are generating a passive loss, you can offset some of the ordinary income with up to $25k of passive losses. You may also be able to claim real estate professional status, if real estate is your primary occupation. That gives you unlimited offsetting.

Yeah this is all I do. I guess I could do a 1031, right?

I need a new car this year, can I write off a car, or only a truck?

If its a fix and flip, you can't do a 1031. Its inventory, not an investment. Which is why its ordinary income, not capital gains.

I ask my CPA about this sort of stuff. I don't think you can write off a vehicle, per se. You can deduct mileage or actual expenses. Not sure, though, how you would directly deduct the vehicle.

Bryan makes a good point, though, and one that sometimes gets overlooked. You have income, you're making money. Paying taxes just goes with making money. Having real expenses and deducting them is one thing. Spending the money just to generate a deductible expense just results in less money in your pocket than had you paid the tax.

If this is the same deal you discussed here, the gains on this property are only a small piece of your tax problems this year.

Jon, this is a different deal. I know what you mean about spending unnecessarily. There are some things I need to spend on anyway, so I figure it might be better to do them in the year of the gain, if they help offset it.

I wasn't aware that you couldnt do a 1031 on a flip, are you sure about that? I am wondering why it is ordinary income and not a short term capital gain? I don't think I am classified as a dealer, since I do way more rental business than reselling.

Originally posted by Dan Inc:
I am wondering why it is ordinary income and not a short term capital gain? I don't think I am classified as a dealer, since I do way more rental business than reselling.

The IRS is going to evaluate each deal on its own merits to determine if your intent was to flip or rent. In this case, it's going to be very clear that your intent was to flip (you're admitting it), so this deal will be classified as such.

If there is disagreement between you and the IRS regarding the intent of a deal, the fact that you have lots of retnals may work in your favor, but it doesn't appear that there is any disagreement in this case.

Would you lose money on any of your rentals if you sold one? If you happen to have a least favorite one that you bought rather recently it might work. Then any gain would be offset by one to one on the loss on your rental- I think. Do you have other real estate you might want to get rid of?
Maybe you could rent it out for a year, then 1031 it into a couple rentals.

Good idea kama, I do have a rental that i'd be willing to sell at a loss!

I can't hang on to this flip property since my holding costs are very high, the HOA dues alone are $600 a month.

Look into the 179 tax deduction... Not sure if it applies for 2012.. Basically you can write off any business related equipment in full on the year of purchase...

New vehicle should fall under those guidelines..

I purchased a barely used Polaris Sportsman XP & a New 14' trailer last Christmas..

I really wanted to build a work shop at my Office building, but apparently a shop falls under Real Estate and has to be depreciated..

@Bryan Hancock ,

I agree with you; however, I must say that arranging your affairs in a position that benefits yourself might be an area that will allow you to save on your tax bill.

I firmly agree to not spend just to not have it taxed. I don't know if you have seen my comments on mortgage interest.

@Dan Inc ,

@Jon Holdman is correct on this matter. So I must guess that you do not have any other source of income personally aside from a spouse.
You may deduct the costs of a vehicle if that is what you use to visit your properties.

As far as not being about to do a 1031(Like Kind Exchange), You most definitely CANNOT; this is because the property is a flip, you have said so yourself and your holding period will indicate this as well. A flipping activity classifies you as a dealer. Your other properties may be eligible; however, anything related to a flip is not. Short term capital gains are taxed at your ordinary rate anyway so this will have no effect; you benefit from it not being a capital transaction(which would disallow mileage and many other deductions).

In your situation a work truck may be more appropriate; however, your S-corporation could purchase it and just include the value of your personal miles in your paycheck.

By having the corporation purchase the vehicle you will be able to depreciate it: For the first year the maximum for passenger vehicles is: 11,160 For trucks and vans it is 11,360, and for SUVs over 6,000lbs it is 25K. There are various other provisions related to vehicles; however, they can be one big benefit.

It is VERY distinct that if you operate a business you must pay taxes when you profit from the merchandise you sell. It doesn't matter if you have more rentals than you do flipping, you are still generating ordinary income.

@Kama Ward , does bring up a very good point; however, the first rule of making money is to not lose money. don't lose future profitability for a tax savings now.

You could also rent it for awhile; however, the IRS has determined that if someone who is flipping a property rents out their inventory they 1. cannot take depreciation 2. must pay SE tax on the proceeds.(since it is in an S-corp you avoid this).

@Ed Lee, new vehicles are limited in how much you can 179 the first year.
Also if you build a temporary building, that may be eligible to be treated as 5 year property. Consider something like a mobile home on skids or a modular movable building. It will also qualify for bonus depreciation.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

Yes, I only meant if you had a marginal property you might already want to get rid of that also would be a loss- this would be the year to sell it. Not to lose 50k just to save 35% of 50K!

So a quick question.

If you were to owe taxes at ordinary income why not give a big chunk of that to charity??

This way instead of giving tax money to government programs you have no control over and a government that can't balance the budget you give to charities where you influence how much of every dollar goes to the cause.

Not to mention the good will that it brings and felling good about making a difference.I have a feeling people do not get that same feeling paying taxes to an out of control government.

Is there limits with a corp on how much you can give to charities within a year??

Originally posted by Steven Hamilton II:
I firmly agree to not spend just to not have it taxed.

Well then we agree then ;-)

Another thing to consider is that paying money to an accountant is equivalent to paying a tax too. In either case you are paying money to someone. The money paid to the accountant should have a reasonable chance of saving you MORE money that you would have to pay to the government or it isn't worth it. Chasing every last cent in tax reduction is sub-optimal in many cases too because the money you pay to your accountant will exceed the money you would have had to pay to the government. This is also biting off your nose to spite your face.

Do tax planning that makes sense in the course of your overall business. Don't go crazy with things though. Any money spent on tax avoidance should be more than offset by the money you would have shipped to the government.

So I'll revise my stated mission to maximal after-tax AND after-accounting-fees income and not minimal taxes.

Joel, good idea on the donations, I'll have to check to see if there is a limit.

Charity limit is generally 50% of you AGI and then it is carried over. See Pub. 526

@Kyle Spiewak ,
@Joel Owens ,
@Dan Inc ,

I'm all for donations to places you care about; however, I will not donate just to donate. I take advantage of non-cash donations as most people severely underestimate them.

An S-corp can give as much as they want and it will pass to the shareholders onto Schedule A subject to the limitation of what category organization it was given to: 50%: School/Church/Community/health govt org 30%: Veterans/fraternal/nonprofit cemetery/ private foundation.

Why donate $100 to save $25-33?(25-33% tax rate)

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

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