Offlinemy name is brandon and i just came from my uncle's house where he invited a individual he's known for quite some time now to come share his knowledge of real estate investing to us cause he has been doing it for years now. one of the things he mentioned in our meeting was capitol gain taxes and flipping infringement. He was saying something like if you sell a house you havent own for more then 90 days that you may get hit with flipping infringement...and the thing is alot of the strategies mention by dean and some of his success stories states where they purchased a home and turn around and sell it within a month to sometimes two weeks.How did they they not get hit with flippin infringement?... and he also stated that , say for example, a guy brought a house worth 150,000 and he owes 50,000 left on it and you buy the house from him for 50,000 and turn around and sell the house for lets say 85,000 to 90,000... then you well get hit with what there is called capitol gain taxes. Thats when you profit from the sell 1 half times more then what you purchased the house for. Ive notice that dean has not mentioned that in his book and im wondering why. Where is the loop hole in this? How is this prevented?...and if its not preventable how can you make it less harsh to where the goverment wont eat you alive in taxes and take all the money you earned. It like basically they taking your money for doing such a good job selling!
Capitol gain taxes and Flipping infringement
Posted on: Sun, 08/09/2009 - 00:36
Capitol gain taxes and Flipping infringement
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- by mrblackshear
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tax consequences you form an LLC or corporation. That's why you don't personally sign for the loans, etc. Your corporation or LLC is the entity that is purchasing the properties not you.
KimmyJ
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Even forming an LLC or Corp, you will have to pay taxes on any profits it makes. Then when you as the shareholder receive your earning, you will have personal taxes. Capital Gain's Taxes are not a bad thing. Capital Gains are taxed at a lesser rate than ordinary income, such as W-2 wages and Self Employment, interest income, unemployment and rental income.
I think this is the correct number. It is in Dean's books. In a nutshell you have a period of time to purchase equal or up and not have to pay capital gains taxes.
Review the books for the specifics.
1031 exchanges are a great loophole. Brian is correct in the capital gain taxes, but remember that as a corporation you have a ton of write offs to offset the taxes. As an individual, you can't always make those deductions. That's why so many investors choose to incorporate.
KimmyJ
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What are the different structures of a Section 1031 Exchange?
To accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section 1031 exchange is a simultaneous swap of one property for another.
Deferred exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.
To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations. .
The way I understand this is that for example: You trade one house for another house than that would be a deferred exchange, not selling one and using money to buy another. I have never dealt with this in my tax practice. I have dealt with 1031 exchanges with farmers and small businesses. Example: Farmer has old tractor, takes and trades it in on newer tractor. The gain that he may have from recapture of depreciation could be postponed since there was a like kind exchange. Also, if this old tractor happens to be an antique, he could have a large capital gain on it because in 1940 the tractor cost $500.00 and now it is worth $20,000. He could then postpone in a like kind exchange or pay the capital gains tax which would be lower than ordinary taxes at a later date when things catch up. Anyone have a better understanding of this? Please correct me if I'm wrong.
Brian
Okay, I am getting my real estate license and they way I learned is basically what Brian is talking about. You purchase something, if you didn't live in it for at least 3 years than you are subject to capital gain taxes if you sell. To avoid capital gain taxes you do a 1031 exchange. In order to do a 1031 the property you are exchanging must be "like kind" and must be equal to or greater than the total net sales of your property. In addition, the IRS requires that both properties be for productive business or trade as investment. There are two time frames that you must adhere to. The first is a 45 day identification period where you identify possible exchange properties. Once the property is sold you have 180 days to purchase a replacement property.
KimmyJ
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Thank you for the advice... see the thing is i only have dean's (how to profit from real estate in todays down market) i dont have any of his other books. can you just explain one more time please on what you was saying cause what you typed to me i didnt quite get... as far as the whole period of time to purchase equal or up and not have to pay capitol gains taxes
maybe i should read everyones comments before i reply next time.. I mean the information that you all gave to me was so helpful cause im not goin to lie... When the guy was explaining that to me and my uncle is was a little discouraging to me to hear that. I want to thank you all again! im goin to have to look more into this. I have one other thing to ask yall... i know in deans book that he teaches you have to purchase a house and sell it for profit... But do yall recommend me to form a corparation or a LLC for i even purchase my for house or try this No Money Down system that dean teaches?
Do you have to pay capitol gains taxes when you do an assign or bird dogging because to my understanding, when you use these methods, you are not actually taking possession of the property, you are just selling the interest in the contract. Am I right on this?
Thanks
Sue
Yes, I believe you are correct. When it comes to bird dogging or assigning, I would think that would fall under self employment rules (unless you are a LLC or Corp) You would then pay income and self employment taxes on this income. You could deduct any expenses that you would have incurred, such as mileage, long distance phone calls, office supplies, etc. Hope this helps.
Brian