| Flipping houses for a living is
a real trick |
|
|
|
The taxman cometh
One other point to consider: As far as the IRS is concerned, buying
and selling real estate as an investment strategy and doing it as
a business are two very different things. If you buy a house, fix
it up, and resell it while you're working another full-time job
that provides the bulk of your income, that's an investment and
the proceeds will be taxed as short-term capital gain (if you own
it for a year or less) or long term capital gain (if you own it
for more than a year. A short term capital gain is taxed at the
same rate as your ordinary income. A long-term capital gain currently
is taxed at 15 percent of the gain.
But if you're doing it year-round and it pretty much
pays all your bills, that's a business and the IRS might consider you a dealer-trader,
says Los Angeles-based CPA and tax attorney Bill Abrams. Then your gain will be
taxed as ordinary income no matter how long you own it, the real estate taxes
and interest will be regarded as an expense and you'll have to pay self-employment
tax of 15.3 percent.
Plus, you won't be able to take advantage of IRS section
1031
like-kind exchanges, which can help with taxes when you have
a property that sells for substantially more than you paid for it.
Only property that's held as an investment qualifies for this tax
break; while the tax code doesn't specify a time frame, the rule
of thumb supported by case law is that you need to hold it for at
least a year to qualify.
Right
place, right time
So, does it make any sense at all to do this? For
the right people and the right reasons, sure. Detroit-based real estate broker
and investor Ralph R. Roberts tells people to learn everything they can about
the industry and don't consider making it a career until they've made double the
amount of money in a year that they do in their current job. "One
person I went to high school with bought a house every year for 30 years,"
Roberts says. "He's flipped about 10 of them. Now he's building a mammoth
house. But he never did it to get rich; he did it to have financial independence.
You can't go into it for the hype. You do it for financial security down the road." If
that's your plan, maybe you don't need to quit your day job after all. It's possible,
although often exhausting, to moonlight as a flipper, says New York-based real
estate attorney Neil Garfinkel. "I know plenty of guys
who do two, three, four houses a year, keep their health insurance and do this
on the side," he says. "Many times, they can double their salary." And
that's all you really wanted to hear, isn't it? | 
