Flipping Has Tax Consequences

Flipping Has Tax Consequences

Flipping Has Tax Consequences
If you​ are looking at​ making a​ quick hundred-thousand on​ real estate flipping,​ you​ may find it​ is​ quick,​ but not as​ lucrative as​ you​ thought.
With housing prices on​ the​ rise across the​ nation,​ flipping has become the​ hottest investment trend .​
You buy a​ property and quickly resell it​ at​ a​ higher price.
Most people even believe flipping to​ be more lucrative than the​ stock market .​
Plus,​ you​ get the​ rush of​ making a​ deal .​
Plus there is​ a​ physical object to​ look at​ to​ judge your investment by.
But if​ you​ aren't careful when flipping that real estate,​ your investment strategy could be a​ party that the​ IRS attends.
Bill Rucci of​ Rucci,​ Bardaro and Barrett says that many of​ today's real estate investors are completely uninformed when they begin their transactions.
There is​ a​ huge misconception on​ part of​ some people who think they can buy a​ residential home,​ not necessarily their personal residence,​ fix it​ up and sell it; and then get what we used to​ call the​ old rollover provisions,​ where you​ used the​ money you​ made to​ buy another property for more than what you​ sold,​ explained Rucci.
But there are two problems with that approach .​
One,​ that rule existed for personal residences only; and two,​ it​ doesn't exist anymore,​ he said.
The rollover rule was replaced in​ 1997 with current law that allows for the​ tax-free sale of​ personal property in​ many cases .​
This works great if​ you​ are selling your primary residence after living in​ it​ for many years,​ but if​ you're selling a​ house you​ haven't lived in,​ your in​ a​ different group .​
The residence will be considered an​ investment property,​ and the​ tax considerations are completely different and more costly.
We have tens of​ thousands of​ people getting into real estate,​ says Mark Zilbert,​ a​ Realtor .​
The majority of​ buyers understand that they can flip for a​ profit,​ understand what it​ means dollarwise,​ but they don't understand that taxes could reduce just how much of​ a​ profit they make.
Instead of​ running a​ fast game,​ a​ tax-smart flipper could benefit from a​ slower investment pace.
Investment profit,​ whether stocks or​ real estate,​ is​ considered capital gain and is​ taxed at​ two levels .​
The tax rate depends on​ how long you​ own the​ property.
Keep it​ for less than a​ year and your short-term gains will be taxed as​ ordinary income .​
That means you​ could be facing up to​ 35% .​
If you​ hold the​ property longer than a​ year,​ you​ will pay a​ long-term capital gains rate that maxes out a​ 15% for most taxpayers.
Not all flippers have a​ year to​ wait .​
Not even for taxes.
But you​ must beware how much you​ flip.
When you​ complete several transactions in​ a​ short time,​ the​ IRS could consider your transactions as​ a​ business rather than an​ investment strategy .​
Then you​ have to​ pay the​ higher ordinary income tax rates.
The IRS is​ watching flippers closely.
The IRS is​ out looking for these transactions,​ says Rucci .​
If the​ IRS decides your investment is​ a​ business; that what you​ are doing is​ to​ earn a​ living,​ the​ property changes from a​ capital asset to​ a​ means of​ producing income that's subject to​ ordinary tax rates,​ plus the​ additional burden of​ another 15.3% in​ self-employment taxes .​
That is​ what the​ government is​ pushing for.
Tax costs won't deter many flippers .​
One way of​ looking at​ it​ is​ that you​ don't pay taxes unless you​ make money.
The easiest way to​ pay less tax on​ a​ flip is​ using the​ capital-gains technique .​
Simply hold onto the​ property for more than a​ year and pay the​ long-term capital gains .​
You can try to​ time your real estate sale during the​ same tax year you​ suffer a​ loss on​ another long-term asset .​
Then use the​ loss to​ offset your gain.
If you​ want to​ avoid taxes altogether on​ the​ property,​ simply move in​ .​
You must live there for two years out of​ the​ last five years .​
When you​ sell it,​ up to​ $250,​000 of​ your profit is​ excluded from taxation,​ double that if​ you​ are married and file jointly.
You can also defer paying taxes on​ your real estate gain by exchanging the​ property for another property,​ known as​ a​ like-kind or​ Section 1013 exchange.
No matter what you​ do,​ make sure that you​ keep good records .​
You can really benefit from proper documentation when claiming real estate investment deductions.

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