Fix and Flip - Section 179 - Auto Purchase 6,000-14,000 GWVR

Tax, SDIRAs & Cost Segregation

Fix and Flip - Section 179 - Auto Purchase 6,000-14,000 GWVR

Realtor · Los Angeles, CA · Member since 2017 · 99 posts · 97 votes

I'm a realtor who is currently finishing my first fix and flip with a business partner through our LLC that we formed from each of our individual Corporations. I've been pouring through articles on this topic, but am not getting my questions fully answered (they probably are answered, but I'm not fully getting it).

Bought a house to flip in 2021, and will (hopefully) sell it in 2021. Projected gross profit after renovation and holding cost expenses is $100k ($50k will flow into each of our individual Corps).

I need a new work vehicle, because lease ended a few months ago, and heard about a loophole to deduct certain vehicles weighing 6,000-14,000 GWVR (I won't list them all here).

Will my vehicle purchase reduce the taxes on the $50k, and I'd have to pay taxes on what's left, or do you not get to be cute with it, and taxes come right our of the house flip beforehand? Maybe I'm confusing this with bonus depreciation.

I also thought I read that I would need to purchase the vehicle before the flip was sold (recorded).

One other question, I generally lease and write off my lease. I also read that you can also write off the entire amount of a lease and it will realize the entire purchase?

Would I need to use Bonus Depreciation to make this all work?

I know most answers will be "ask your CPA or hire one." I was hoping to vet some CPA's at BPCON21, but didn't bump into any. I'll be reaching out to some shortly, but figured I'd ask my questions here anyway.

Thanks in advance.

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Holly Chan
Accountant · Bellevue, WA · Member since 2017 · 14 posts · 7 votes
5y
To answer your question, I'm going to assume that the work requiring your new vehicle is done within your individual corporation, and that the corporation would be purchasing the vehicle regardless of the flip, i.e. there is a business purpose for the purchase which will continue when the flip is completed.
To make this work, the corporation should purchase/lease the vehicle in the same year the flip is sold. The full lease value becomes an asset which is eligible for 100% bonus depreciation (assuming the vehicle is used 100% for business purposes). There are limits to bonus depreciation on passenger vehicles which a 6,000+ lb vehicle is not subject to. It's an eligible asset for Section 179 expense, as well, but Section 179 expense has other limitations including property cost and taxable income limitations. You'll likely get a better result taking bonus depreciation. By recognizing the full value of the lease, you do not then expense the lease payments as they're made. Instead, you book the asset and a liability and then reduce the liability each time a lease payment is made.
The gain on the flip will come through as either short-term capital gain or ordinary income, depending on how regular, continuous, etc the flipping activity is. If it's ordinary, the depreciation on the vehicle will directly offset the income. If short-term capital gain, the rates are the same but it will be reported differently.
There are other considerations in your overall situation, including SE taxes, classification of the income streams, passive vs. non-passive and use of a corporation to name a few. Definitely engage a CPA to make sure you're getting the best tax result.
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Shawn Regnier
OP
Realtor · Los Angeles, CA · Member since 2017 · 99 posts · 97 votes
4y
Originally posted by @Holly Chan:
To answer your question, I'm going to assume that the work requiring your new vehicle is done within your individual corporation, and that the corporation would be purchasing the vehicle regardless of the flip, i.e. there is a business purpose for the purchase which will continue when the flip is completed.
To make this work, the corporation should purchase/lease the vehicle in the same year the flip is sold. The full lease value becomes an asset which is eligible for 100% bonus depreciation (assuming the vehicle is used 100% for business purposes). There are limits to bonus depreciation on passenger vehicles which a 6,000+ lb vehicle is not subject to. It's an eligible asset for Section 179 expense, as well, but Section 179 expense has other limitations including property cost and taxable income limitations. You'll likely get a better result taking bonus depreciation. By recognizing the full value of the lease, you do not then expense the lease payments as they're made. Instead, you book the asset and a liability and then reduce the liability each time a lease payment is made.
The gain on the flip will come through as either short-term capital gain or ordinary income, depending on how regular, continuous, etc the flipping activity is. If it's ordinary, the depreciation on the vehicle will directly offset the income. If short-term capital gain, the rates are the same but it will be reported differently.
There are other considerations in your overall situation, including SE taxes, classification of the income streams, passive vs. non-passive and use of a corporation to name a few. Definitely engage a CPA to make sure you're getting the best tax result.
@Holly Chan thank for the extremely thorough explanation. I won't pretend to fully know what action to take, besides the obvious, hire an real estate CPA! At least I now know I have viable options.
To answer your question: Yes I will be using this vehicle primarily for real estate endeavors (real estate agent and investor/flipper), but it closer to 90%, not 100%. I'm not sure if I will be buying the vehicle outright or leasing it. I'm generally a fan of leasing, but if it's my best interest to buy outright, then I will. I had also read that the vehicle doesn't even need to be brand new, just brand new to me, which may be a better option if buying outright.
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