Loopholes for cap gains on a flip?

12 Replies

Hello people! I was wondering if there are any ways to reduce your hit on capital gains from the sale of a flip.

Can you roll profits into a down payment on a new SFR property without getting hit or are there any other clever ways? Not that I'm opposed to paying good old Uncle Sam, I'm just curious. Thank you πŸ™πŸ» πŸ™πŸ»πŸ™πŸ»

Originally posted by @Anthony Porembski :

Hello people! I was wondering if there are any ways to reduce your hit on capital gains from the sale of a flip.

Can you roll profits into a down payment on a new SFR property without getting hit or are there any other clever ways? Not that I'm opposed to paying good old Uncle Sam, I'm just curious. Thank you πŸ™πŸ» πŸ™πŸ»πŸ™πŸ»

 No matter how you use the profit from the flip (downpayment, buy another investment or any other business spending), you still going to have to pay taxes on the profit that is already been earned. 

As lance mentioned above, there are few ways if you funnel your money to retirement plans, you can save up to almost 50-60k from tax. But the money will stay in your 401k other qualified plans, and cannot be used for other deal.  

Also, the flip profit is taxed as ordinary income with subject to selfemployment taxes, not as cap gain. 

I rent my nicer rehabs for 366 day minimum with an option to buy.  Better renter with more skin in the game.  Bonus no realtor commissions if they exercise and purchase. 

Now you've held for productive use for 1 year and are in long-term cap gain land.  But this is the way of the Napper.  Normal is not. Make your choice.  

Originally posted by @Steve Vaughan :

I rent my nicer rehabs for 366 day minimum with an option to buy.  Better renter with more skin in the game.  Bonus no realtor commissions if they exercise and purchase. Now you've held for productive use for 1 year and are in long-term cap gain land.  

While it does address the tax problem, it creates several other problems:

  • your capital is tied for a year
  • you become a landlords, with all related headaches
  • the tenant can destroy the property into which you just poured cash for rehab
  • and more

 

Originally posted by @Glidden Rivera :

How do you market your properties with lease option. What do you find to be the most effective means of finding the right tenant buyer?

Google "John Jackson lease options." The guy is a master of LO. 

 

Originally posted by @Michael Plaks :
Originally posted by @Steve Vaughan:

I rent my nicer rehabs for 366 day minimum with an option to buy.  Better renter with more skin in the game.  Bonus no realtor commissions if they exercise and purchase. Now you've held for productive use for 1 year and are in long-term cap gain land.  

While it does address the tax problem, it creates several other problems:

  • your capital is tied for a year
  • you become a landlords, with all related headaches
  • the tenant can destroy the property into which you just poured cash for rehab
  • and more

I wouldn't expect a worker bee w2, self employed, wholesaler or flipper person  to relate to the irrational thought of tying up capital for a year.  What, invest?  LOL 

To mitigate risk, my TBs pay an option fee of 3% for the right to buy.  They are also well qualified by all normal screening measures.  Less likely to have a hood tenant that destroys property after they qualify and put up $9k.

My TBs also cover the first $150 of maintenance/repairs that arise.  Less headaches. 

My average savings when they buy just in not having realtors and Fed tax savings alone is over $30k.  How many more naps/vacations could the average worker take saving $30k net,  $38k+ after taxes earned from work?

But it must be done properly and I wouldn't recommend someone whose never been a landlord become one just for this. Too much to learn and too much risk. I was just throwing out an idea that works for a Napper like me that hasnt had a job in 17 years.

 

Originally posted by @Steve Vaughan :

To mitigate risk, my TBs pay an option fee of 3% for the right to buy.  They are also well qualified by all normal screening measures.  Less likely to have a hood tenant that destroys property after they qualify and put up $9k. 

Be careful with that. High down payment may backfire on the tax side. Courts have reclassified such deals from L/O to "disguised sales", forcing instant taxation of the entire gain. 3% and $9k may not be high enough, but keep it in mind.