consequences of flipping real estate|
Kay Bell Bankrate.com||
If you're looking
to turn a quick buck on a real-estate transaction, accountant Bill Rucci has some
words of warning: "It may be quick, but it also may not be as lucrative as
you first thought."
As housing prices in many parts
of the United States skyrocketed, "flipping" -- buying a property and
then quickly reselling it at a higher price -- has become the hottest investment
Many people view it as more
lucrative than the stock market. Plus, flippers enjoy the tangible aspect of the
deal. Since real estate is "real," you can look at a property and neighborhood
and get a personal take on whether or not it's a good investment.
if you're not careful with your real estate flips, your investment strategy could
produce a sizable payoff for an unintended partner: the Internal Revenue Service.
Real estate tax confusion
a CPA and partner in the Boston-based accounting firm Rucci,
Bardaro and Barrett, says that many of today's real estate investors go into
the transactions completely uninformed.
"There is a huge
misconception on the part of some people who think they can buy a residential
home, not necessarily their personal residence, fix it up and then sell it; and
then get what we used to call 'the old rollover provisions,' where you used the
money you made to buy another piece of property for more than what you sold,"
But, says Rucci, there are two problems with that
approach. "One, that rule existed for personal residences only; and two,
it doesn't exist anymore."
The rollover rule was replaced
in 1997 by the current law that allows, in many cases, for the tax-free
sale of a personal property. This is a great tax break if you're selling your
primary residence after having lived in it for several years, but it does nothing
for you, taxwise, if you're selling a house in which you have never lived. In
this case, the residence is an investment property, and the tax considerations
are completely different and definitely more costly.
expectations, higher taxes
Just as costly is the mind-set of many real-estate
"We have tens of thousands of people getting
into real estate. There's a gold-rush mentality that, 'If I invest in condos,
I'll make money,'" says Mark Zilbert, a Realtor and real estate broker whose
Zilbert Realty Group has
created an offshoot, CondoFlip, to tap the soaring, Miami marketplace where his
company is based.
"The majority of buyers understand
that they can flip for a profit, understand what it means dollarwise, but they
don't understand that taxes could reduce just how much of a profit they make,"
Lonnie Davis, a CPA with the Philadelphia office
of CBIZ Accounting, Tax and Advisory
"The biggest issue with the real
estate market, with the boom and prices rising very quickly, is that people want
to capitalize on their gains, to take the money and run, so to speak," says
Invest in patience as well as
Instead of running, a tax-smart flipper could benefit from
a slightly slower investment pace.