Avoid Capital Gains on a Quick Flip Project
Hi Everyone,
Is there a way to avoid the significant impact of Capital Gains Tax on a quick flip and sell project? I purchased a Triplex which I will be converting into Condos and selling each unit individually. I looked into the costs and state (NJ) rules, etc for the condo conversion and am good to go. I potentially could have a quick 40-50% gain in executing this strategy. I want to take the windfall and invest it quickly into another investment property in an effort to avoid Capital Gains Tax. However the only way I know to do this from a tax strategy is a 1031 Exchange. Since I would only have this property for about 4-6 months I don't think I will qualify for the 1031.
I been looking but am unsure if there is anything else I could do to avoid the gain tax. Thoughts?
Thank you in advance!
1031 is not for flip properties, it is for properties that are held as rentals. You are probably stuck paying taxes.
You could always sell some loss properties, stocks, etc. Making money and paying taxes is not the end of the world.
I remember hearing someone say that he was so bummed out because he was paying 600k in taxes. I said wow thats crazy. How much did you make?? He said, well it was a couple mil. WOW poor guy. Planning is what is important in your overall investing and tax strategy.
When you do a quick flip you wont be paying capital gain taxes you will actually be paying income taxes. The profit can throw you into a completely different tax bracket. If you owned the property, used it as a rental/business for a period of time - I believe it is 1 year, then you would pay capital gains tax on the sale. I think after 1 year of it being a rental property you can then use 1031.
Talk to your CPA/accountant
#3 Tax, SDIRAs & Cost Segregation Contributor
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#3 Tax, SDIRAs & Cost Segregation Contributor
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"Flips", the intent of buying and selling houses quickly normally results in ordinary income and not the capital gain preferential tax treatment.
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Thank you all. I appreciate the feedback. Looks like I am getting to the stage of obtaining a CPA!
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#1 1031 Exchanges Contributor
- Qualified Intermediary for 1031 Exchanges
- St. Petersburg, FL
@Michael LaMorte, The way to make this work with a 1031 would be to convert the triplex. And then rent the individual units for a period of time. Then you can sell them and do a 1031 exchange on each sale. Ordinary income tax in NJ is going to hammer you. So there's some motivation to slow it down just a bit.
And if there's any value add component you can space this out and do that one unit at a time which might give you some more margin. Time is your friend! Taxes - not so much!
I think the answer is work on a tax strategy with a CPA who is familiar with REI.
