Best Tax Strategy for Flipping Homes?

[ericrugiero]

I'm interested in flipping homes occasionally.  Having never done it (except for one slow flip where we lived in it long enough to prevent capital gains tax) I'm wondering about the tax implications. 

My current taxes are pretty simple.  W2 income in the low six figures, married filing jointly with 3 dependents, very minimal other income, not enough itemized deductions to exceed the new standard deduction. 

Does anyone have any input on how I might optimize taxes while flipping a house?  Let's say I could buy one for $60,000, spend $10,000 fixing it up and sell for $110,000.  Is there an advantage to something like an LLC or S Corp? 

Thanks

[radram]

Look into the 1031 exchange.

If you sell a property, you use that money to buy the next property( or properties), deferring the capital gain.

That, and the primary residence exclusion are the only ways I know to defer/avoid the capital gains.

You could 1031 a few properties, then 1031 into a new primary residence. Live there 3 years and repeat.

[tralfamadorian]

Look into the 1031 exchange.

If you sell a property, you use that money to buy the next property( or properties), deferring the capital gain.

That, and the primary residence exclusion are the only ways I know to defer/avoid the capital gains.

You could 1031 a few properties, then 1031 into a new primary residence. Live there 3 years and repeat.

This is bad advice. You can do some research on irs.gov for the details but without getting into the weeds, when someone flips a property, the IRS considers the business as buying and selling goods to make a profit, not the business of real estate. Thus the property does not qualify for a 1031.

You can get around this by renting out the property for a couple of years before selling, though at that point most wouldn't call it a flip.

[radram]

Look into the 1031 exchange.

If you sell a property, you use that money to buy the next property( or properties), deferring the capital gain.

That, and the primary residence exclusion are the only ways I know to defer/avoid the capital gains.

You could 1031 a few properties, then 1031 into a new primary residence. Live there 3 years and repeat.

This is bad advice. You can do some research on irs.gov for the details but without getting into the weeds, when someone flips a property, the IRS considers the business as buying and selling goods to make a profit, not the business of real estate. Thus the property does not qualify for a 1031.

You can get around this by renting out the property for a couple of years before selling, though at that point most wouldn't call it a flip.

You are right about the tax rules being strict. Occasional, long flips(> 1 year) as the OP described might just qualify. I didn't say use the rule, I said to look into it. That is in no way bad advice.

Adding that he could have a renter is a great addition to using the 1031 rule. I see "more than a year" as being critical to the rule, so of course look into it before initiating one.

[SeattleCPA]

Look into the 1031 exchange.

If you sell a property, you use that money to buy the next property( or properties), deferring the capital gain.

That, and the primary residence exclusion are the only ways I know to defer/avoid the capital gains.

You could 1031 a few properties, then 1031 into a new primary residence. Live there 3 years and repeat.

This is bad advice. You can do some research on irs.gov for the details but without getting into the weeds, when someone flips a property, the IRS considers the business as buying and selling goods to make a profit, not the business of real estate. Thus the property does not qualify for a 1031.

You can get around this by renting out the property for a couple of years before selling, though at that point most wouldn't call it a flip.

I agree with tralfamadorian. BTW I also don't think you can combine Sec 1031 with Sec 121 either.

[Grafter]

OP - It depends on what sort of structure you are doing it in and your exact situation (so this is just a thought exercise for me, and if you want tax advice, go to a local professional).  As I've seen people flip houses personally (and it should usually go on schedule C if they are making a business out of it, as it is generally a non-passive activity), or do it in an LLC (treated as a partnership, if there are multiple owners), or in an S corp.  In the partnership or Schedule C, you have to worry about SE taxes on top of income taxes, but that is now mostly offset with the QBI deduction.  Otherwise, it is treated as ordinary income for income tax purposes.

In an S corp, you have to worry about running payroll for compensating the officers (which in turn reduces the amount of the QBI deduction). 

Granted, there are a number of other considerations, such as: state level entity taxation, if all of the W-2 income is you or your spouse  and how close you are to the SS cap (and if so, then you could do it under their name and not be subject to all of the SS of the SE tax portion, due to hitting the SS wages cap).  As well as if you want to keep on doing it (and need the equity from the sale to help fund deals) or if you want to use some of it for some sort of self employed retirement plan (which would reduce income taxes, but not SE taxes).

[radram]

Look into the 1031 exchange.

If you sell a property, you use that money to buy the next property( or properties), deferring the capital gain.

That, and the primary residence exclusion are the only ways I know to defer/avoid the capital gains.

You could 1031 a few properties, then 1031 into a new primary residence. Live there 3 years and repeat.

This is bad advice. You can do some research on irs.gov for the details but without getting into the weeds, when someone flips a property, the IRS considers the business as buying and selling goods to make a profit, not the business of real estate. Thus the property does not qualify for a 1031.

You can get around this by renting out the property for a couple of years before selling, though at that point most wouldn't call it a flip.

I agree with tralfamadorian. BTW I also don't think you can combine Sec 1031 with Sec 121 either.

I see what I did now. The Taxpayer Relieve Act of 1997 was updated in the Taxpayer Relief Act of 2008 (what a relief :) lol ). In the 2008 modification, they specifically discuss converting rental property to primary residence and only allow the gains DURING residency to be excluded(after 2008).

I was looking at an article pre 2008.

Good day all.

[SeattleCPA]

Look into the 1031 exchange.

If you sell a property, you use that money to buy the next property( or properties), deferring the capital gain.

That, and the primary residence exclusion are the only ways I know to defer/avoid the capital gains.

You could 1031 a few properties, then 1031 into a new primary residence. Live there 3 years and repeat.

This is bad advice. You can do some research on irs.gov for the details but without getting into the weeds, when someone flips a property, the IRS considers the business as buying and selling goods to make a profit, not the business of real estate. Thus the property does not qualify for a 1031.

You can get around this by renting out the property for a couple of years before selling, though at that point most wouldn't call it a flip.

I agree with tralfamadorian. BTW I also don't think you can combine Sec 1031 with Sec 121 either.

I see what I did now. The Taxpayer Relieve Act of 1997 was updated in the Taxpayer Relief Act of 2008 (what a relief :) lol ). In the 2008 modification, they specifically discuss converting rental property to primary residence and only allow the gains DURING residency to be excluded(after 2008).

I was looking at an article pre 2008.

Good day all.

FWIW, I had a guy call me on phone once, years ago, ask if he could combine Section 1031 and Sec 121. I told him, "no way man!..."

A little while later, Congress rewrote the Section 121 statute... to say that people couldn't combine sections... which meant that *actually* caller was right prior to change in law and that I was wrong... Technically then he could have done what he wanted. (Except the law changed before he could have implemented.)

Point: Gosh this stuff is fluid and hard to stay on top of... Ugh.