How to make passive income from fix and flips

Question

Hello,

I’m new to the real estate investment world and I’m looking to do fix and flips and have been doing a lot of research and studying. I have a question and this might sound dumb but when do you take profits for your personal gains? Say you sell a house for $200k and $50k is net profit. If I take $10k for my personal gain will I be taxed on that?

John Williams · Answer

I highly recommend the book "Profit First." It is one of those foundational books for entrepreneurs - on par with The E-Myth!

Rob Beeman · Answer

@Jose Mora  Jose, pay heed to the comments of hiring a qualified accounting professional. It may not actually be a CPA, as an EA (Enrolled Agent) might better fit your business, and typically come at lower hourly fees. Wise to interview a few (even if over the phone or virtually) before choosing one, and I found it best to use the services of one that is very experienced in working with real estate investors, and easy for you to get a hold of. Good luck sir.

Dominick Johnson · Answer

*that is $500k PROFIT if married filing jointly, $250k PROFIT if single to avoid paying capital gains tax. You also have to live in the home for 2 years minimum.

Dominick Johnson · Answer

Hi @Jose Mora, fix and flips are about as far from passive as it gets in real estate investing. I am telling you this based on experience, it can easily make your life hell for 6+ months. If done right, you can make a "quick" profit, but if passive is your goal than look into rentals or wholesaling.As far as taxes, anything profit will be taxed regardless of how you spend/save it. The trick is to reinvest it to delay paying the taxes (or live in it for 1 year and avoid paying capital gains tax if it sells under $500k). You should know what your plan is with the money from the sale before you even buy a property, so I would echo what others have stated and recommend you consult a CPA first.

William Harvey · Answer

@Jose Mora There really isn't any way around the tax piece. Whatever your net profit is going to be taxed as short term gains, which I believe is the same as ordinary income....or at least it is close to ordinary income. One thing I do from the income generated from house flipping, is passively invest in multifamily and mobile-home park deals. With those kinds of deals that have heavy year 1 bonus depreciation, the "losses" I incur from the K-1's goes directly against my earned income from the house flipping. The reason why is because I am considered a full-time real estate professional in the eyes of the IRS. So, even though the house flipping isn't super tax-efficient, by investing in tax-efficient things like multifamily, you can drastically reduce the net amount you'll pay in taxes. Just make sure to talk to your CPA and that you will pass the sniff test to be considered a full time real estate professional. Hope this helps!

Fulton Abraham Sanchez · Answer

@Jose Mora, hi. Welcome to Biggerpockets! There are over 20 very competent real estate friendly CPA firms/professionals here in BP working with clients remotely. Please reach out to one you feel is a better fit.

Chris Seveney · Answer

@Jose Mora

Fix and flips are not passive. What I have seen people do is live in the property for two years then sell it for some tax benefits.

You can confirm this with a cpa but I recommend not getting cute when dealing with tax implications

Andy Sabisch · Answer

Depending on how you are structured (personal, LLC, etc.) will dictate tax consequences . . . you want to get that straight BEFORE you buy the property.  Most HMLs will only fund to a company not an individual.

In you scenario, if you net $50K from a flip and are not setup as an LLC, it is all taxed as short term capital gains regardless of what you call it. You can talk to a CPA for how you can reinvest and avoid the taxes but find this out first and then buy the property.

John Mathew · Answer

Hi Jose! Rentals are the most proven way for real estate investors to create passive income. Each individual rental is just one piece in your portfolio’s passive income. Accumulating a large number of cash flowing rentals is the most proven strategy for building passive income.

Basit Siddiqi · Answer

gain on the sale of a house isSales price less sales expenses less adjusted basis.Adjusted basis is purchase price plus improvements less accumulated depreciation.Best of luck

How to make passive income from fix and flips

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