1031 deffered tax

[siloxtreme]

Hi experts,

Just a a question for clarifications....

If I flip a property < 12 months, and then use the proceeds to buy another property that I sell > 12 months - what are the taxes due?

Is it 35% + 15% .  or is it 15% + 15% ?     I'm a little confused - it's taxes!

[Dave T]

If you are flipping property, the holding period does not matter.  The profit is ordinary income at whatever your marginal tax bracket rate happens to be, plus 15.3% self-employment income taxes, no matter whether you flip in less than 12 months or take longer.

If you are flipping property, your property is not eligible to participate in a 1031 tax-deferred exchange

[mcwagner]

so for most folks, flipping takes out about 45% in taxes. 

That's 45% of the profit, so be sure to take mileage, cell phone calls, money to the kids for hauling trash, and all the other eligible expenses.

[siloxtreme]

I'm confused, If I sell a house and use the proceeds to buy another house, Rehab it, and then sell it again - that is not considered a Capital Gains asset?  I thought for some reason the rules were similar to the Stock Market - for short term and long term gains, only you can use the 1031 to defer the tax in a "like kind exchange?" 

[Dave T]

The 1031 exchange rules are restricted to investment property or property used in your trade or business.  To be "like-kind" property, both the relinquished property and the replacement property in your exchange must be property held for investment use or property used in your trade or business.

Even though your primary residence is real estate, it is considered personal use property and not investment use property.  Therefore, your primary residence is not "like-kind" property for 1031 exchange purposes.  Same for a second home, personal property not investment use property.

Flip property is not investment property, it is inventory (merchandize) to your business.  Inventory is not depreciated, does not get capital gains tax treatment, can not participate in a 1031 exchange, and is not eligible for installment sale tax treatment.

[SeattleCPA]

I totally agree with Mark and Dave T... (I'm a CPA.)

I would also note that you can use an S corporation to minimize the 15.3% self-employment tax you pay.

Google on the phrase "how s corporations save taxes" for an article I wrote, if you're interested in more details.