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Flipping houses for a living is a real trick
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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.

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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?

Bankrate.com's corrections policy-- Posted: March 30, 2006
 
 
More stories by Pat Curry
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 RESOURCES
The tax consequences of flipping
Anti-flipping rules can hurt investors
Real estate investing can be risky
 TOP REAL ESTATE STORIES
How to lower your property taxes
Forged signature puts kibosh on home sale
Will mortgage assumption solve crisis?
 

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