Author Topic: Taxes - slow turn "flip" with reno  (Read 1123 times)

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Taxes - slow turn "flip" with reno
« on: October 21, 2017, 05:49:39 PM »
This may belong in the tax section, but I figured it might get more responses here.  I have some time and money on my hands and have recently seen some homes that need a decent amount of reno work that are in the right price range.

To determine whether I think it is worthwhile, I would like to learn more RE how the entire investment would be taxed.  I say "slow" flip since this is a first for me, and I am able to take the time.....and, I'd like LT cap gains treatment. 

So, assuming:

 - buy home (have enough cash to buy and do reno, but am looking into financing options as well)
 - do reno
 - sell after a year

how are the following treated:

 - property tax while owned
 - interest expense if financed
 - insurance while owned
 - improvements vs. maintenance.........all work would be improvements, I think, since it is returning the prop to livable status.
 - utilities while owned (power and water.....need to be on to do work)
 - other costs I am forgetting right now.

I know how these things are handled if it were my primary home, but, given it would be treated as an investment, I know it is different.

retired?

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Re: Taxes - slow turn "flip" with reno
« Reply #1 on: October 21, 2017, 05:52:28 PM »
I hit "Post" when I meant to hit "Preview".  Basically, I want to learn how to do the cap gain calc, and how any expenses not allowed in that calc could be handled.

If it goes fine, I'd start another and perhaps consider ST.  If not, then I will have learned a good bit along the way.

Thanks.

Kroaler

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Re: Taxes - slow turn "flip" with reno
« Reply #2 on: October 24, 2017, 12:55:55 PM »
I'm not a tax expert but "don't let the tax tail wag the dog"

Also if you go into this, I advice having good contractors with referrals.

tralfamadorian

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Re: Taxes - slow turn "flip" with reno
« Reply #3 on: October 24, 2017, 06:16:14 PM »
I'm not an expert- I don't flip.

However, I believe all flips are classed as ordinary income and taxed at the marginal rate and possibly SET because the houses are treated as inventory by the IRS. The only way to avoid this is to rent them out for some period of time; then, when sold the gains would be taxed at either short-term (marginal rate) or long-term (if more than a year). 

But, really, why not BRRR them?  Buy at below market price, renovate, rent then refinance (or mortgage if purchasing with cash).  If you purchase correctly and renovate prudently, hopefully most of your funds would come right back out and be ready for the next one. 

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Re: Taxes - slow turn "flip" with reno
« Reply #4 on: October 24, 2017, 06:41:52 PM »
I'm not a tax expert but "don't let the tax tail wag the dog"

Also if you go into this, I advice having good contractors with referrals.

I understand your point.  I did a decent bit of reading after posting the question.  Basically active income vs passive income seems to determine whether it is a "business" or an "investment".  Flipping, in the true sense, i.e. repeated many times per year, is considered a business.  Subject to payroll and income tax.  It's the payroll tax that I'd like to avoid if it can be classified as an investment.  In this case, I could pay 0-15% tax.  As a self-employed business, it would be 15.3% payroll tax and income tax on top.

If I were to do this frequently, I would have to switch it to a business, but that is not the plan initially.

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Re: Taxes - slow turn "flip" with reno
« Reply #5 on: October 24, 2017, 06:45:19 PM »
I'm not a tax expert but "don't let the tax tail wag the dog"

Also if you go into this, I advice having good contractors with referrals.

I do have a contractor that I trust.....did our bathroom remodel.  Otherwise, I agree that finding a good one is a big concern.

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Re: Taxes - slow turn "flip" with reno
« Reply #6 on: October 24, 2017, 06:47:14 PM »
I'm not an expert- I don't flip.

However, I believe all flips are classed as ordinary income and taxed at the marginal rate and possibly SET because the houses are treated as inventory by the IRS. The only way to avoid this is to rent them out for some period of time; then, when sold the gains would be taxed at either short-term (marginal rate) or long-term (if more than a year). 

But, really, why not BRRR them?  Buy at below market price, renovate, rent then refinance (or mortgage if purchasing with cash).  If you purchase correctly and renovate prudently, hopefully most of your funds would come right back out and be ready for the next one.

I was starting to think this may be the way to do.  Why the refinance part?  Because I'd start with a "investment loan" or other non-standard type? 

So, when doing this, there would be little depreciation, and the sale would go towards LT cap gains?

tralfamadorian

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Re: Taxes - slow turn "flip" with reno
« Reply #7 on: October 24, 2017, 07:17:24 PM »
I was starting to think this may be the way to do.  Why the refinance part?  Because I'd start with a "investment loan" or other non-standard type? 

So, when doing this, there would be little depreciation, and the sale would go towards LT cap gains?

The refinance part is presuming that you purchase the property for $X and after the renovation, it will be worth $X+Y.  And that your mortgaged amount 75%*($X+Y) >> 75%*$X. So in the end you will have less equity tied up in it and more of your initial capital (75%*$Y) back in your bank account.  But if you plan to mortgage upon purchase then sell in +/- one year than the closing costs and paperwork hassle of a cash out refi would not be worth it.

It can be a good idea in two situations:
1) If you buy in cash, you can put a primary mortgage as soon as you finish the reno with no six month seasoning required.
2) Refi at least six months after purchase if bought with a loan and planning to hold.

As far as I know, the crux of the business vs investment question hangs on intent.  If your primary purpose is to make money through a sale, then that's business intent. Also, I believe an important secondary test is if there is a full time job showing significant income. From your comment about having time on your hands, it sounds like this test may be an issue as well. But if you show at least some rental income, then it's a moot point.  Yes, there would be some depreciation recapture.

Long article from a real estate focused CPA here-
https://www.biggerpockets.com/renewsblog/2015/11/08/flipsqualify-long-term-capital-gainspay-self-employment-tax/

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Re: Taxes - slow turn "flip" with reno
« Reply #8 on: October 25, 2017, 09:58:36 AM »
Thanks, T.

I had seen other items on BP about this, but that link/post is the most informative.