house flipping question

[Steven Lopez]

Found my 1st flip. Its pre foreclosure. 

I am concerned on the taxes I will have to pay on the flip. expecting to profit 100,000.

Any help on a strategy to lessen my tax burden would greatly be appreciated.

Thanks Steve

[Dave Foster]

Hey @Steven Lopez, both @Brian Garrett and @J. Robert Santos are correct.  A 1031 exchange is what you would need to defer all that tax on what looks to be a nice return.  But unfortunately a 1031 exchange is only available on property you have purchased with the intent of holding for productive use.  Property you purchase with the primary intent of resale becomes classified as inventory.  You cannot do the 1031.  And you get tagged hard with taxes including probably self employment as well as ordinary income.  Flipping carries a high cost in the form of taxes paid on profit.

The way to mitigate this so you maximize your profit is to change your model slightly.  Instead of buying a flip.  Buy a distressed property you think would be a good property to hold and rent as well as having a lot of upside in value add.  Buy it, fix it, rent it, and then after a time evaluate whether it still makes sense as a rental or whether it is time to sell and 1031.

There is no statutory holding period.  It is about your intent and what you can demonstrate as your intent.  Most folks feel comfortable with a hold of a year but there could always be circumstances where more or less would be prudent.

A tax bill of more than $30K can be a strong motivator.