How can you really make a profit in flipping homes when there is capital gain tax involved?

Question

Fipping houses for profit has been the latest "trend", especially on TV and they make it out to be so easy; find it, flip it, sell it, $$$.
However, I was under the impression that you have to pay a Capital Gain Tax on the profit of the sale, which is never mentioned on TV. Is this true or is there ways around it?

Answer 1

Yes, you can make money on real estate flipping! This is one of the best ways to do it: Either you buy homes in distress through courthouse auctions, homes that you can repair, or new home construction. You can use creative financing well because you dont plan on owning the property for very long, so the demands of the loan wont be very high. As for the latest trend, baloney! Savvy investors have been doing this for years. Really the best investors dont flip them, they rent them. Setting each home up as a individual corporation which limits their personal and financial liabilty.
As for captial gains, if you reinvest the money within 180 days of the closing through a 1031 exchange company, you can DEFER the taxes as long as you keep investing and purchasing. Straight capital gains will cost you between 15-32% of the profit you make off the home, depending on what your TOTAL taxable income is for that year. There is no other investment out there that will yield those kinds of returns with such little intial investment. Not to mention the writeoffs you get to counter your taxable income requirements- exp:motgage interest, closing costs, title insurance, and so on. Rentals yield even more tax writeoffs.
Dont waste your money on those programs! If you get a chance to read "The Automatic Millionaire Homeowner" you should, it has lots of good info in it. Get yourself a good agent, a good CPA, and research the market before you buy in that area, you will do fine.

Answer 2

Capital gains is on the profit, not on the gross sale price. And the capital gains tax is less than 100% even for the highest investors. So, simple math says if you dont make any profit, you don't pay any capital gains tax, and if you do make a profit, you only pay part of the profit.

However, anything you see on TV is to be viewed with skepticism. If you don't really know much about real estate, you can make some simple mistakes that can bankrupt you really fast.

The only man I knew personally who made a lot of money on real estate had worked for many years as an estimator for a large construcion company. he could look at a house, and tell within a few hundred dollars what it would cost to fix it. You, without that background, could easily get stuck with a lemon that needed thousands of dollars before it could be sold.

Answer 3

Capital gains tax is paid on investment property held over 12 months. "Flipping" implies rapid turnover, usually is just that and therefore most likely will not qualify for capital gains treatment. In that case the tax will be what ever your income bracket is. Capital gains tax is 15% of the profit above the cost basis. A 1031 exchange is a little more complicated than meets the surface, has a cost and could exceed the tax. You should evaluate the option before you try it, it is not for everyone.

There are fairly recent rule changes involving government loan programs covering property being flipped, that being use of FHA/VA loans (50%-60% of home sales use these), that being you cannot get a government sponsored loan on it until a specified period of time has passed. I think that it is a year, thereby reducing sale opportunities substantially (they failed to tell you that too). There are too many homes being bought by "investors" who buy FHA/VA repo homes for a low price and then resell them for a profit. Many got them under false pretenses, that being they were going to owner/occupants (owner/occupied bidders have a priority over investor buyers).

There are "TV gurus" that would have you think that it is easy and anyone can do it. One I will not name has been bankrupt more than once and makes his money like the rest of the genre- on the poor saps that buy his material and into his program for a fee. Note that all have the caveat disclaimers that read something like "Results are not typical of all investors" as they show you success story 1-6. They fail to tell of the hundreds that failed and lost big. Some even tell you to mortgage your home to the max- bad advice.

The investment housing market is tough- even for the experienced, and at this time is generally slowing. I see a slowdown coming. I personally am positioning myself with a cash position to take advantage of the less savy investors ignorance of what is coming, and I'll do it with commercial or apartment investment properties.

You should take legitimate real estate courses (leave the tea leaves, tarot cards and crystal ball alone), learn/know something of construction costs, the mortgage process, the real estate market and minimally employ a successful real estate broker to handle the sale and buy process. Contrary to what some will tell you, you can not successfully do it all and be everywhere at the same time, something suffers and usually it is all or part of the deal. The money a good broker makes you will far exceed their cost. They track the market, have access to great financing options, know good subs to call for the rehab process, and have access to repo properties many times before they are in the market thereby expanding your opportunities. Failing to employ a successful reputable broker likely will also far exceed the cost had they been employed. These and numerous other reasons are why the overwhelming majority of homes sold in the USA involve a real estate agent.

Would you hire a brain surgeon with a 10% success rate and then mainly with dealing with their family to do brain surgery? Then stay away from "For Sale By Owner" real estate. Everything has a cost. Be sure you are able to bear it.

Answer 4

Flipping Houses Australia

Answer 5

It is not the latest trend this has always been happening.Yes you can make alot of money doing this or any other Nitches in Real Estate.But you really need to get educated before venture out.There are books,Cd's and www.russwhitney.com they offer courses in Real Estate.Asset Protection Course will show you all the tax strategy's available and Creative Financing.Just keep in mind when you Invest in Real Estate is basically all expenses are rite off.(gas,car expense,food,repairs etc.)

Good Luck

Real Estate Investor

Answer 6

so long as you sell it high enough to cover your eventual taxes then there is no problems. many lenders don't really like flipping of houses so best to take around 5-6 months for the whole process. some lenders will flip but at very significant costs.

Answer 7

Do a 1031 exchange. That will defer your taxes as long as your next purchase is higher than the one you previously sold. Consult a real estate professional who specializes in commercial property for more info.

Answer 8

make enough to cover the capital gains tax, also sell it yourself to avoid the realtors 6% commission

Answer 9

Hi Jonas,

Try http://www.1031.com/ for more information regarding 1031 exchanges.


Good Luck,
~Trey

Answer 10

You have a year before you have to report the capital gains, and or reinvest.