If you are a real estate flipper or rehabber, you are buying and selling properties primarily with the intent of reselling them. And if you're a buyer or a rehabber and you're doing a short term hold, you’re probably doing it in a fashion that is most tax inefficient, which means that you're going to get hammered with the most amount of tax. You're not holding these properties typically for long-term capital gains so you're in the short-term capital gains arena.
Changing your Business Model
Here’s a tax-saving tip -
- Change your business model from flip, flip, flip, to:
- Buy the property, fix it up, and rent it out for a period of time.
That way, instead of being a flipper you're an investor and you’re renting out these properties for a year or more. Now you can say to the IRS that you’re NOT holding these primarily for resale. You’re an investor in these properties and you want to do 1031 exchanges when you ultimately decide to sell that property.
Who can you sell the property to? Well if you have a tenant in the property leasing it, why not give them the springing option at the end of their 12 month lease that says if the tenant complies with all the terms and conditions of the lease they will have the exclusive right to purchase the property for x price.
1031 Exchange Advantages
The advantage for you is that you might have a potential buyer locked in from the outset. Also from a landlord management perspective, if the tenant thinks they have the prospect of buying the property from you, they are more likely to care for and treat the property as if it were their own. They won't be chopping vegetables on the countertop without a cutting board they’ll be careful to take care of those counters. So for many reasons flippers need to think about changing their business model and becoming investors so that they can avail themselves of the tax deferral under 1031 and go from being in the most tax inefficient to perhaps the most tax efficient, deferring those gain indefinitely, perhaps forever.
- 1031 Hotline: If you have questions about flipping property, tax efficiency and 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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