Capital Sales Tax = Bummer

3 Replies | Columbia, South Carolina

Hey BP Family have you ever done an analysis on a possible property you can flip and realize the amount of capital gains tax you would have to pay? Well I recently did and I am flabbergasted on the amount that I would have to pay. I have been researching on ways that I can utilize that amount for my benefit instead of "giving it away." I would love to hear your advice, book recommendations, and any guidance that you would have for a newbie. Thanks again.

@Tim Moore If you are flipping houses, you unfortunately will be stuck paying ordinary income taxes instead of capital gain taxes and you also won't be able to defer any taxes with 1031 exchange. You can avoid the taxes if you do a cash out refinance but it will be tough to be able to cash out more than 80% of ARV. Depending on how well you managed your rehab costs you may or may not be able to pull out profit with a 80% cash out refinance.

@Tim Moore yep, that was the same unfortunate experience I had over 20 years ago.  The only way to eliminate that is to change your model.  Instead of buying fixing and flipping (the intent or immediate resale) you change that to buy fix rent and hold for a while (the intent of holding for investment use).  Add to that a refi like @Sudhanshu Singha suggests and you'll end up getting the money you need for your next project while not having to pay any tax on the gain from the first property because you'll do a 1031 on that one when you sell.  

This is why a lot of people shifted over more to the BRRRR strategy.

Where instead of selling you keep the house as a rental and pull out your improvement value via a refinance. 

Pulling value out of a house via debt isn't taxable.