Avoiding Taxes On A Flip

I have recently purchased a lot from a Developer in my name, and have obtained a construction loan from my bank to do an owner/builder home. Now that I am midway through the process, I'm realizing due to a job change that I will not be able to live in the house, but will instead need to sale. What is the most profitable way to do this and potentially avoid any of the capital gains? Once construction is completed, would it be best to transfer the property (at cost) to an LLC, S CORP, or C CORP, then sale? Of course I would like to avoid refinancing the construction loan at completion, to avoid closing costs, and I even wonder if I'll be able to do that without misleading a lender that this will be my primary residence. Any thoughts would be appreciated.

Comments(6)

  • NewKidinTown223rd September, 2004

    Does not matter how you title the property. There is no tax deferral technique that would apply to your circumstances.

    You avoid capital gains by not taking any profit. Sell for your cost basis plus selling costs, and you have no taxable gain.

    Of course if you don't want to pay any taxes on your gain, you can always resort to tax evasion if you are willing to take up residence in a federally funded gated community.

  • brainstorm23rd September, 2004

    It does not matter how you hold title, I flip for a living and we (dad and I) put an LLC together thinking this would deffer taxes. I helps from a lawsuit stand point in a sense. It helps by being recognized as business and if as long as you do this for a living then you have alternatives to writing off expenses like a corp. If you make good money and are at the peek of your salary and you make a profit, then you gained.. If you were unemployed and you made a profit, you made a living and you would be subject to a tax if over 15k. (what ever poverty level is considered under either under 15k or 20k)

  • NewKidinTown222nd September, 2004

    This appears to be a dealer transaction. All of your profit ($10K) in this case is fully taxable in the year of the sale. The IRS considers a CFD a sale on the date you enter the contract.

    If you can make the case that this property is an investment property (not likely from the circumstances you have given), the CFD is treated as an installment sale. As such, your profits are only taxed as you receive them.

  • SyrInv23rd September, 2004

    NewKidinTown2,

    Thank you very much for replying. This is what makes sense to me; I had read some articles that seemed to be implying that the entire sale price over my equity (~$75 in this ex.) would be treated as capital gains -- which sounded a little absurd.

    I have no problem w/ paying capital gains on the actual profit of $10k, particularly in light of the recent capital gains & dividends tax regs that are in force to 2008. Seems like a good time to be flipping!

    Cheers

  • rajwarrior23rd September, 2004

    in this transaction, you won't be paying capital gains tax. Most likely, the transaction will be considered a dealer transaction and you will be taxed on the profit as ordinary income. Check with your account for specific details on the matter.

    Roger

  • SyrInv23rd September, 2004

    Hi Roger,

    I think I can dodge the dealer bullet on this one, since by the great majority we usually do straight rentals... but we'll see!

    Thanks for your input.

    grin

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