Easy money in real estate "flipping"
You watch the shows on TV where the people show huge gains on properties they buy, remodel, landscape, and cash in on, and it looks easy, right? When they show the "profit" at the end of the show, they aren't really telling the whole story. Let's look at what happens with that"profit."
Say you bought a house for $150,000 and worked on it, cleaned it up, and sold it for $250,000 a month later. An easy $100,000, right? But since you didn't hold the property for more than 12 months, it makes it a short-term capital gain. Now, you'll pay a federal rate of as much as 35%, not the 15% long-term capital gain that investors get for long term gains (held for more than one year). Add a state tax, say 5%, and you now owe $40,000 in taxes. But wait, it's not over yet!
If the IRS considers you to be in the real estate "trade or business" that makes all your profits ordinary income taxes at your highest bracket. In addition, that will subject you to self-employment taxes, which drains another 15% out of your profits. Now, from your $100,000 gain, you've only cleared $45,000.
The next fun thing to crawl out from under a rock is the AMT, or alternative-minimum-tax. I won't even pretend to explain this tax, but just know that you can pay a rate of 26% to 28%.
If you pay a Realtor commission on the deal, say 6% or $15,000, you start to see that "flipping" houses isn't the slamdunk it can appear to be.
A better strategy? Buy value, hold for at least one year(maybe lease the property), enjoy tax benefits and shelter, and 1031 exchange into another property. For more on 1031 exchnages, look here http://lakeoftheozarksreal-estate.com/content/article.html/53635
Say you bought a house for $150,000 and worked on it, cleaned it up, and sold it for $250,000 a month later. An easy $100,000, right? But since you didn't hold the property for more than 12 months, it makes it a short-term capital gain. Now, you'll pay a federal rate of as much as 35%, not the 15% long-term capital gain that investors get for long term gains (held for more than one year). Add a state tax, say 5%, and you now owe $40,000 in taxes. But wait, it's not over yet!
If the IRS considers you to be in the real estate "trade or business" that makes all your profits ordinary income taxes at your highest bracket. In addition, that will subject you to self-employment taxes, which drains another 15% out of your profits. Now, from your $100,000 gain, you've only cleared $45,000.
The next fun thing to crawl out from under a rock is the AMT, or alternative-minimum-tax. I won't even pretend to explain this tax, but just know that you can pay a rate of 26% to 28%.
If you pay a Realtor commission on the deal, say 6% or $15,000, you start to see that "flipping" houses isn't the slamdunk it can appear to be.
A better strategy? Buy value, hold for at least one year(maybe lease the property), enjoy tax benefits and shelter, and 1031 exchange into another property. For more on 1031 exchnages, look here http://lakeoftheozarksreal-estate.com/content/article.html/53635
posted by Lakereeltor at 8:49 AM
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