Just did first flip - Tax questions *Seeking local CPA*

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Just did first flip - Tax questions *Seeking local CPA*

Ben Kirchner
Durham, NC · Member since 2016 · 125 posts · 42 votes

I've been a buy a hold & land investor up to this point.  I just completed my first flip.  I've been doing my own taxes up to this point, as it didn't seem too complicated with my current rental portfolio.  Now that I've done my first flip, I'm seeking a real estate tax savy CPA in the Durham, Raleigh, Chapel Hill, or Carborro area.

What should I expect to be taxed on? I purchased the house and rehabbed it in cash. I'm paying interest on my HELOC. Beyond that, I've paid fees such as inspections, and utilities. My realtor will get his commission. Are all these expenses to be accounted for? Therefore purchase price - All of what's mentioned = Overall Profit

Being loose with numbers, but let's say $100k was my purchase price + all expenses, and $150k was the purchase price.  $150-100= $50,0000 to be taxed on?   Would the $50k be taxed within my income bracket?  Or additional for short term capital gains, as I only owned the property for 3 months?

Any insight on the above is appreciated.  Hoping to link up with a CPA in the North Carolina RTP area as well.
 

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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y

No you can not use proceeds from a flip to doa  1031 exchange. 

1031 exchange is for investment properties.

A flip will be ordinary income taxed at your normal tax rate + self employment tax. It's the same as operating any other business to the IRS. 

Instead of buying flour, eggs, and sugar and making and selling cakes for profit

You bought a crappy house, materials, contractor labor and are selling a nicer house for profit

Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
WebsiteView Page
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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Ben Kirchner your post doesn’t make a lot of sense. You say the purchase price was 100k and then it was 150k. Do you mean the sale price was 150k?

    Your tax basis will be your purchase price, plus rehab. Then sale price minus closing fees and rehab and acquisition price etc equals profit. Profit is taxed at your ordinary tax bracket.

    Not a CPA, consult a cpa as this isn’t tax advice

    0Reply
  • Ben Kirchner
    OP
    Durham, NC · Member since 2016 · 125 posts · 42 votes
    6y

    Yes, I meant $100 purchase price + rehab, and $150 sales price.  

    0Reply
  • Ben Kirchner
    OP
    Durham, NC · Member since 2016 · 125 posts · 42 votes
    6y

    Also - so if $50,000 is what is being taxed, and what is the percent that is being taxed?  The same percent of my income tax bracket, or otherwise?

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y

    Did this flip sell in 2019 or 2020 for starters?

    If in 2020 this all goes on your 2020 return. 

    ALL expenses related to the flip - purchase price, holding costs, renovation costs, closing costs are reported as  Cost of Goods sold on Sch C

    And your sale Price will be reported as income. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    1Reply
  • Ben Kirchner
    OP
    Durham, NC · Member since 2016 · 125 posts · 42 votes
    6y

    Thanks @Natalie Kolodij.  This sale was done in 2020, so it will be on next year's tax return.  However, I want to prepare for it.  I'm still unsure of that percentage of the reported income from this will be taxed?  

    Also, while this is not a 1031 exchange, I've heard that it may be possible to roll the profit into paying down another existing mortgage to prevent it from being taxed?  This information was unsure of by the person mentioning it.  

    And as far as a future 1031 exchange - If my intention was to to roll these funds into another flip, and roll those funds into another one, my understanding is I would need to have the NEXT property to flip already claimed to do a 1031 exchange?  The issue with this would be I would need to sell the existing property in order to purchase the next one.  Is there another way around this?  

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y

    No you can not use proceeds from a flip to doa  1031 exchange. 

    1031 exchange is for investment properties.

    A flip will be ordinary income taxed at your normal tax rate + self employment tax. It's the same as operating any other business to the IRS. 

    Instead of buying flour, eggs, and sugar and making and selling cakes for profit

    You bought a crappy house, materials, contractor labor and are selling a nicer house for profit

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    4Reply
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    6y
    Originally posted by @Ben Kirchner:

    Thanks @Natalie Kolodij.  This sale was done in 2020, so it will be on next year's tax return.  However, I want to prepare for it.  I'm still unsure of that percentage of the reported income from this will be taxed?  

    Also, while this is not a 1031 exchange, I've heard that it may be possible to roll the profit into paying down another existing mortgage to prevent it from being taxed?  This information was unsure of by the person mentioning it.  

    And as far as a future 1031 exchange - If my intention was to to roll these funds into another flip, and roll those funds into another one, my understanding is I would need to have the NEXT property to flip already claimed to do a 1031 exchange?  The issue with this would be I would need to sell the existing property in order to purchase the next one.  Is there another way around this?  

    Ben, you dont need a CPA in Durham, you need a capable real estate savvy investor CPA and I would suggest you contact @Natalie Kolodij by PM and pay for her time to get these issues resolved for you. Good advice now is worth a lot more than "maybe" good advice later, IF you can find someone in your local area (which is not easy I can attest) Most CPA's are not equipped to actually handle these types of situations.

    3Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    6y

    Joke is on you, @Account Closed - I can't recommend Natalie highly enough.  She's one of the smartest tax pros on BP.

    Podcast Guest on Show #244
    2Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    6y

    Get low rate student loans and keep reusing your seed money for higher return real estate profits.

    0Reply
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