Do I pay taxes on flips? YES OR NO!?! SHOOT STRAIGHT!!

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Do I pay taxes on flips? YES OR NO!?! SHOOT STRAIGHT!!

Charlie Moore
Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes

Do I pay taxes on flips

What do I do

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Nathan Hall
Rental Property Investor · Martinsburg, WV · Member since 2017 · 111 posts · 81 votes
7y

@Charlie Moore @everyoneelse

Am I the only one that realizes that this person is a troll?

Don't feed the trolls. They thrive on attention. If you want this sort of nonsensical confrontationalism to go away, you have to ignore it, like a toddler throwing a particularly cringe-worthy tantrum.

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  • David Hanor
    Insurance Agent · Greenville, SC · Member since 2018 · 42 posts · 51 votes
    7y

    Yes, of course you pay taxes on any profit. You should work with a CPA who specializes in real estate so you can minimize your burden though.

    You can avoid this only by doing a 1031 exchange into another property.

    19Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    7y

    flip profits are taxed as ordinary income

    5Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @David Hanor:

    Yes, of course you pay taxes on any profit. You should work with a CPA who specializes in real estate so you can minimize your burden though.

    You can avoid this only by doing a 1031 exchange into another property.

     can only 1031 properties held for long term rental..  flips are inventory and it goes to intent when you purchase.. even if U go over the one year threshold if the intent was to flip then its inventory and ordinary income.

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  • Bill Plymouth
    Real Estate Agent · Philadelphia, PA · Member since 2018 · 416 posts · 396 votes
    7y

    @David Hanor I don’t think you can do a 1031 exchange for flips.  I believe that it’s only “long” term investment properties.  

    7Reply
  • David Hanor
    Insurance Agent · Greenville, SC · Member since 2018 · 42 posts · 51 votes
    7y

    @Bill Plymouth @Jay Hinrichs

    Thanks for the info. I only do buy and holds so I am not an expert (or CPA) but from everything I've read about 1031 exchanges is that you do it to avoid capital gains. Capital gains tax on real estate held less than 1 year is taxed at ordinary income and at 1 year + is 0, 15 or 20% depending on taxable income level. Regardless of when you sell, it's still a "capital gain" by definition. 

    I don't see anything about intent for 1031 on what you're going to do with the property being sold.  I'm looking at the IRS website but maybe there's something buried in the code that's not readily visible. 

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @David Hanor:

    @Bill Plymouth @Jay Hinrichs

    Thanks for the info. I only do buy and holds so I am not an expert (or CPA) but from everything I've read about 1031 exchanges is that you do it to avoid capital gains. Capital gains tax on real estate held less than 1 year is taxed at ordinary income and at 1 year + is 0, 15 or 20% depending on taxable income level. Regardless of when you sell, it's still a "capital gain" by definition. 

    I don't see anything about intent for 1031 on what you're going to do with the property being sold.  I'm looking at the IRS website but maybe there's something buried in the code that's not readily visible. 

    intent is every thing talk to any CPA that does real estate yo will find out.. your dealer status..  when your intent is flipping I have been a dealer for 40 years  believe me if I thought I could just hold a flip 370 days that's what I would do.. but against the rules.  

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @David Hanor, like @Jay Hinrichs said, intent is everything.  Property that qualifies for 1031 treatment is property you have purchased with the intent of holding for productive use in trade business or for investment.  There is no statutory holding period.  In fact any gain is not recognized when doing a 1031 exchange whether capital or ordinary.  This is why there is no holding period but rather the standard of intent and how you can demonstrate that intent if ever asked.

    Because @Charlie Moore, is describing a transaction where he purchased a property primarily for resale it does not qualify for a 1031 exchange.   And yes Charlie you'll pay ordinary income tax and maybe self employment tax and maybe the ACA surcharge.  In other words a bunch.  Sharpen up your pencil and look for expenses.  That's all you can do.

    Or you could change your model a little.  Instead of fix n flip, fix n rent n evaluate.  When you're intent is to hold (most folks feel comfortable with anything more than a year) you are then eligible for 1031 and get to defer all tax and depreciation recapture.

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  • Nicholas AiolaBusiness Member
    CPA & Investor · New York, NY · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    @Charlie Moore A few things...

    As @Jay Hinrichs said, if you flip homes, you are considered a "dealer" in the eyes of the IRS. In that case, as @John Thedford said, profit from flips is taxed as ordinary income. It is considered earned income (not capital gain) and is also subject to self-employment taxes.

    To reference Jay again, intent does go a long way but that's a deeper discussion.

    @David Hanor

    Additionally, as @Bill Plymouth alluded to, you cannot do a 1031 exchange on a flip. The properties themselves are considered inventory in a flipping business and do not qualify for a like-kind exchange.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Jay Hinrichs, as an aside, remember that case back in 2012 I think where that developer lost his huge exchange because He "forgot" to remove the for sale listing and signs?  He'd been trying to sell the property since the crash of 08.  And the IRS said his intent was to sell not to hold.  Bummer for him!

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    0Reply
  • Charlie Moore
    OP
    Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes
    7y

    @John Thedford

    How would they KNOW what amount I PROFITED? LOL

    0Reply
  • Charlie Moore
    OP
    Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes
    7y

    @David

    How would they KNOW what amount I PROFITED? LOL

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Charlie Moore:

    @John Thedford

    How would they KNOW what amount I PROFITED? LOL

     All property sales are reported to the IRS. You too should be reporting it when you file your taxes.

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Charlie Moore a competent CPA, agent, property manager could probably answer all your questions if you just asked them

    3Reply
  • Charlie Moore
    OP
    Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes
    7y

    @Caleb Heimsoth

    Eh! Bigger pockets has all these experts though!!!

    1Reply
  • Charlie Moore
    OP
    Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes
    7y

    @Russell Brazil

    Are they really?

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    @Charlie Moore Yes.

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  • Charlie Moore
    OP
    Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes
    7y

    @Jay Hinrichs

    Basically, if I 1031.... I HAVE to use the new property as a RENTAL?

    0Reply
  • Account Closed
    Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes
    7y

    YES you pay taxes.

    NO you can not 1031 Exchange like many above me said.

    0Reply
  • Charlie Moore
    OP
    Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes
    7y

    @Nicholas Aiola

    My FLIP PROFITS, can’t be DUMPED into another home?

    0Reply
  • Charlie Moore
    OP
    Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes
    7y

    @Dave Foster

    This can’t be a real thing lol

    0Reply
  • Tom Makinen
    Member since 2019 · 226 posts · 115 votes
    7y

    if you bought the flip under a c Corp, you can do a few things to minimize the impact of the gain.  

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Charlie Moore:

    @Nicholas Aiola

    My FLIP PROFITS, can’t be DUMPED into another home?

     No they can not as a dozen people have told you. Flips are subject to ordinary income taxes. Capital gains have zero to do with flips.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Charlie Moore, That case?  Sorry to say it.  But yes it's real.  My second favorite case of all time.  Second only to the Chicago investor who lost a $ 3mil exchange because he used his son as his QI.  And couldn't understand why his son the attorney was disqualified from being his QI.  (I can't figure out who was more ignorant - the dad or the son the attorney).

    As far as the legitimacy of this thread - I've known all these guys above in the forum for years.  And none of them has a sense of humor (except John Thedford and he makes up for it with a lot of machine guns).  Your issues are real.  And what they say is true.

    Every real estate sale is reported to the IRS via the 1099 you get that shows the amount of proceeds that come to you.   You also report every real estate sale to the IRS when you file your tax returns.  Well you're supposed to anyway.  But guess what happens when the title company reports a sale by you and you don't report that same sale???  

    You'll have the choice to tell the truth or lie.  If you tell the truth then the IRS will know a sale happened and you will pay tax accordingly (and if it's a flip then it will be a bunch of tax).  If you lie then you commit tax fraud and ...well the penalty's are far worse than any tax would be.

    Adjust your model so you can do 1031s.  Or pay the tax and smile because no one ever died paying tax.  The Gummit won't allow that.  They're highly motivated to keep you performing.

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  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    7y

    Just sell the flip to one of the guys with the signs " We buy houses for CASH "    Tell them you want it in 50's

    9Reply
  • Nicholas AiolaBusiness Member
    CPA & Investor · New York, NY · Member since 2017 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Charlie Moore:

    @Nicholas Aiola

    My FLIP PROFITS, can’t be DUMPED into another home?

    You can reinvest the profits but that won't change the fact that you will owe tax on the profits. You cannot defer taxes on flip profits by way of doing a 1031 exchange.

    You can, however, explore other options like setting up and contributing to pre-tax retirement accounts to shelter some of the tax hit.

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