flipping w/ a partner

[Alex Shaughnessy]

It is my understanding flipping houses is taxed at ordinary income. If the house is held for one year then it is taxed lower. Is this true, and if so, would it make sense for my partner and I to flip the property, rent it out for a year, then sell? we are flipping though an LLC and this is assuming we don't need quick cash.

[Dave Foster]

@Alex Shaughnessy, Stop using the word "flip".  You're giving everyone palpitations :) Flipping as a practice commonly understood is where you purchase property with the primary intent of reselling.  In accounting terms You are taking raw material (a house) and adding value through a process to create inventory to sell.  The sale of this inventory is taxed at ordinary income and you may not 1031.

But what you are describing may not be flipping.  Property that is purchased with the intent to hold for productive use in trade, business or for investment (not primarily for resale) is eligible for 1031 treatment.

What's the magic - Your intent.  So when you use words like "flip"  you are sending a message that your intent it primarily resale and no 1031 allowed.  But if you purchase with the intent to hold and buy, fix, rent, and then evaluate after a year that looks more like your intent was to hold and you are now simply changing that intent?

There is no statutory holding period but in general longer is better.  Most conservative folks feel good at anything more than a year for various reasons.  But there are always circumstances where you can document your intent such that a holding period of less than a year may be appropriate.  The ability to document your exchange could be all kinds of things - current and past practice, stated business model, actual length of hold, actual income production from productive use, correspondance with professionals and colleagues etc.

Here's your statement.  Change the bold words only and it really changes the tone doesn't it?

would it make sense for my partner and I to flip (buy and hold) the property, rent it out for a year, then evaluate for potential sell? we are flipping (buying) though an LLC and this is assuming we don't need quick cash.