How to Sell Turnkey Property Fast

Question

Dave Foster · Answer

@Andrew Y., Your plan is fine if the numbers work for you.  The devils going to be in the details of your particular property and no one has been given enough information to guide you on that.

1. You are planning on holding that property for a year.  That will qualify it for capital gains treatment. So even without a 1031 you will convert that ordinary income tax into a capital gain.

2. If you choose you will be able to do a 1031 at that time as well and completely defer the tax.  By taking the renovated property and renting it out you are in fact demonstrating your intent to hold for investment as referred to above.  So a 1031 at the end of that would be perfectly appropriate.

The question is going to be "what will be the real savings.

1. Right now the house is in pristine sale order.  So your gross profit will be the highest.  If you hold you will incur costs to ready for sale later.  Depending on your renter this could be next to nothing or enough to offset any tax rate savings.

2. The other side of that coin is that your rental will generate income and provide other tax favored treatment.  So in addition to lowering the net tax rate you could also actually make additional net income.

3. The other big joker is opportunity cost of the money now.  How much equity you're leaving in the house in order to rent it.  What you would be doing with that equity.  The cost of the financing etc etc.

Lots of unknowns

Dave Foster · Answer

@Andrew Y. If you sell immediately I imagine you'd have a tough time demonstrating that your intent was to hold for productive use (which is what qualifies it for 1031 treatment).  By actually renting it for a year you definitely demonstrate your intent to hold.

J Scott · Answer

Couple things wrong in this thread:

-  First, taxes on a flip are almost never capital gains -- profits are ordinary income taxed at your marginal tax rate, and may incur self employment tax as well.

-  Next, you can't 1031 a flip property.  1031 is for investment property, which means that either the property was previously held as an investment (i.e., a rental) or the original intent was the hold the property as an investment, but some situation arose that led you to have to abandon that plan.

Marc Winter · Answer

@Andrew Y., I would do neither.  Trying to avoid the cap-gains by renting it out is not a smart gamble. You may end up with a terror of a tenant that will cost you more than the taxes in repairs.  Why not just do a 1031 exchange?  That's what it's there for.

James Wise · Answer

Go with the higher rent. You'll get a better sales price. The folks who would pay more for a lower rent just because the tenant isn't on Section 8 are in the minority.

Andrew Yu · Answer

@Dave Foster About the 1031 exchange, are you saying I should do it at end of my flip, or at end of my 1 year holding time. Thank you for the insight by the way.

How to Sell Turnkey Property Fast

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