Finance2007   Finance for personal business

If you are looking at making a quick hundred-thousand on real estate flipping, you may find it is quick, but not as lucrative as you thought.

With housing prices on the rise across the nation, flipping has become the hottest investment trend. You buy a property and quickly resell it at a higher price.

Most people even believe flipping to be more lucrative than the stock market. Plus, you get the rush of making a deal. Plus there is a physical object to look at to judge your investment by.

But if you aren’t careful when flipping that real estate, your investment strategy could be a party that the IRS attends.

Bill Rucci of Rucci, Bardaro and Barrett says that many of today’s real estate investors are completely uninformed when they begin their transactions.

“There is a huge misconception on part of some people who think they can buy a residential home, not necessarily their personal residence, fix it up and sell it; and then get what we used to call the old rollover provisions, where you used the money you made to buy another property for more than what you sold,” explained Rucci.

But there are two problems with that approach. “One, that rule existed for personal residences only; and two, it doesn’t exist anymore,” he said.

The rollover rule was replaced in 1997 with current law that allows for the tax-free sale of personal property in many cases. This works great if you are selling your primary residence after living in it for many years, but if you’re selling a house you haven’t lived in, your in a different group. The residence will be considered an investment property, and the tax considerations are completely different and more costly.

“We have tens of thousands of people getting into real estate,” says Mark Zilbert, a Realtor. “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.”

Instead of running a fast game, a tax-smart flipper could benefit from a slower investment pace.

Investment profit, whether stocks or real estate, is considered capital gain and is taxed at two levels. The tax rate depends on how long you own the property.

Keep it for less than a year and your short-term gains will be taxed as ordinary income. That means you could be facing up to 35%. If you hold the property longer than a year, you will pay a long-term capital gains rate that maxes out a 15% for most taxpayers.

Not all flippers have a year to wait. Not even for taxes.

But you must beware how much you flip.

When you complete several transactions in a short time, the IRS could consider your transactions as a business rather than an investment strategy. Then you have to pay the higher ordinary income tax rates.

The IRS is watching flippers closely.

“The IRS is out looking for these transactions,” says Rucci. “If the IRS decides your investment is a business; that what you are doing is to earn a living, the property changes from a capital asset to a means of producing income that’s subject to ordinary tax rates, plus the additional burden of another 15.3% in self-employment taxes. That is what the government is pushing for.”

Tax costs won’t deter many flippers. One way of looking at it is that you don’t pay taxes unless you make money.

The easiest way to pay less tax on a flip is using the capital-gains technique. Simply hold onto the property for more than a year and pay the long-term capital gains. You can try to time your real estate sale during the same tax year you suffer a loss on another long-term asset. Then use the loss to offset your gain.

If you want to avoid taxes altogether on the property, simply move in. You must live there for two years out of the last five years. When you sell it, up to $250,000 of your profit is excluded from taxation, double that if you are married and file jointly.

You can also defer paying taxes on your real estate gain by exchanging the property for another property, known as a like-kind or Section 1013 exchange.

No matter what you do, make sure that you keep good records. You can really benefit from proper documentation when claiming real estate investment deductions.

A Specialist Solution to Buy-to-Let Financing for up to 20 Million.

Copyright 2006 Geoff Morris

Looking to consolidate or even improve the efficiency of your portfolio financially? Geoff Morris, of Property Horizons, discusses some interesting ways in which to finance your investment property portfolio with Suzanna Grey, an Independent Financial Advisor at Beacon Financial Limited.

As a property professional, are you looking for a different approach to your borrowing requirements? There is a company specialising in professional landlords that many are unaware of. They are unique in the market place and approach buy-to-let in a very different way to high street lenders. They are from a commercial background and approach the property investment market from that perspective.

They are one of the UKs leading providers of residential buy-to-let mortgages, winning the Buy-to-Let Lender of the Year award at the 2002, 2003 and 2004 Business Finance Awards. They made their first specifically targeted buy-to-let mortgage in 1995 and are unique in being the only UK lender to offer a service totally dedicated to the professional residential property investor.

They provide a bespoke professional service, competitive interest rates and a wide range of products designed specifically with the professional property investor in mind. As a centralised lender a good intermediary is vital to ensure the most appropriate product is selected.

As buy-to-let specialists they have a comprehensive understanding of the market and are able to create mortgage solutions to meet your needs. They are an ARLA affiliated lender and carry out regular research into the buy-to-let market.

Many landlords approach me to help tidy the borrowing they have on their portfolios. Often they have loans with several different lenders, on a range of different products, devised by mortgage brokers who did not view the portfolio holistically – but from a best rate for that property view point.

For those of you who are used to paying high valuation fees, redemption penalties when you remortgage to raise they deposit for the next property, or who are simply frustrated with the onerous administration, I have the solution.

This specialist lender offers a maximum of 20 million to professional landlords. They can pre-underwrite you on the basis of your existing portfolio so your income separate to the portfolio is not considered. This means it is possible to have an offer very quickly without pages of forms to complete. The only item they require will be the valuation, which at a maximum of 125 per property, and with in-house surveyors who understand the investment market, is very competitive.

You no longer need to re-broke your loans if you need to raise capital, simply apply for a further advance. Should your property require updating when you purchase it they are able to pre-underwrite the completed value and will release the additional funds once works have been completed.

The rates are competitive and they understand the professional landlord as this is the market in which they exclusively deal. They will run suitability checks on new areas to ensure they are appropriate for the rental market, free of charge, to help diversify the portfolio geographically to spread the risk. This ensures that you can invest in new areas with confidence.

This type of lender can help you gear your portfolio effectively in order to maximise the available capital and expand your properties. They can also assist you to access the auction deals and special offer properties where fast exchange is crucial.

It makes a refreshing change for a lender to be supportive in your investment strategy, rather than prohibitive.

Suzie Grey is an Independent Financial Advisor at Beacon Financial Limited and can be reached by phone (01480 869466). Beacon Financial Limited is authorised and regulated by The Financial Services Authority. She will be a regular guest on the Property Horizons Teleseminars, and mini-conferences.