From Dennis and Jane Guertin | Guertin Family Realty | (952) 442-1300 |
Investing in real estate is a hot topic, but it comes with tax questions that can be confusing. Here are some things it's helpful to know before flipping a home or investing in a rental property. (Plus, a handy multiple offer strategy tip.)
Dennis and Jane Guertin
(952) 442-1300 Direct

Flips, Investment Properties, and Paying Taxes

Many people are interested in flipping homes or becoming landlords these days, but there's a lot of confusion about the tax ramifications. The following is NOT official tax advice, but simply a heads up about things it may be worth investigating with a tax professional.
- Flipping homes is considered a business. If the IRS considers someone a real estate "dealer" rather than a real estate "investor", income generated from the flips is taxed at income tax rates and is usually subject to self-employment tax as well.

- Income from selling investment properties is typically taxed at a lower rate - the long-term capital gains rate.

When is a home sale a flip and not an investment property sale? Believe it or not, the key determining factor is "intent", which of course leaves it open to interpretation by the IRS.

Contrary to popular belief, holding a property for over a year before selling it does not guarantee that it will be treated as an investment for tax purposes (although it helps prove the case for intent to use it as an investment property).

Likewise, selling a property after a few months does not guarantee that it will be treated as a flip. In some cases sellers have provided strong evidence that they intended to rent out a property and only sold it due to an unexpected event, after which the IRS treated the property as an investment.

- The determination is made on an individual property basis. This means, for example, that the IRS could decide someone who sold five homes in a year had conducted three flips and two investment property sales.

- If you live in a home that you own as your primary residence for at least two of the five years prior to selling, it probably qualifies for the personal home sale tax exemption. (This applies even if it was a rehab that you purchased with the intention to sell at a profit.) In this case, $250,000 of gain from the sale would be exempt from capital gains taxes for a single person, and $500,000 would be exempt for a married couple filing a joint tax return. The gain does not have to be reinvested in another property.

- The personal home sale tax exemption may apply even if you rented out the property prior to the sale, because a key consideration is whether or not you lived in it for at least two of the five years prior to the sale. (If you depreciated the property on your tax return while it was rented you may have to pay taxes on the depreciation amount.)

- For investors, 1031 tax deferred exchanges allow sellers of investment properties (not flips) to defer capital gains taxes when they want to use the funds from selling a current investment property to purchase a new one. This requires using a qualified 1031 tax exchange facilitator.

- Reverse 1031 exchanges are more complex, but allow the seller of the investment property to purchase the replacement property before selling the current one.

- Flipped homes do not qualify for 1031 tax exchange treatment.

The bottom line: It's complicated! :) This is definitely territory for the guidance of a competent tax professional. There are no golden loopholes, but some planning ahead and knowledge of the rules could very well save you money in the long run.

Multiple Offer Tip:
Know Your "Walk Away" Price

In any type of housing market it only takes one other bidder to create a multiple offer situation. When that happens, knowledge is power!

Many people assume that being in a bidding war means paying above market value, but as long as you have a realistic idea of the true market value of a home before making the offer, you know how high you can bid without paying too much.

We can get an excellent idea of how much a home is really worth by looking at similar properties that have recently sold, homes that are under contract, and those that are currently available.

Key Question: How much is the home worth to you? This might be more or less than market value. Ask yourself, "What is the price at which if the home were one dollar more I could walk away content, but if it were one dollar less and I didn't get it I would kick myself?"

Once the seller chooses an offer it's usually the end of the story, so try to imagine getting the phone call saying whether or not you got the home, and then choose a "walk away" price that you'll be comfortable with either way.

What the lawyers make us say: The information here is not presented as expert legal or financial advice. Please use your best judgment and consult professionals when necessary.
Recent Market Highlights
Market chart icon

- U.S. home prices rose 5.8 percent year-to-year in December, according to a recent S&P/Case-Shiller report. They rose 6.9 percent year-to-year in January, according to CoreLogic, a data and analytics company.

- The national average 30-year fixed mortgage rate is in the low 4-percent range.

The January Pending Home Sales Index rose .4 percent year-to-year, according to the National Association of Realtors®.
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Are you curious about your home's current market value, or do you have a question about home buying? Just reply to this email, or call us at 952-442-1300.
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Sometimes real estate-related, sometimes not... these are assorted links that come in handy:

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An "unexpected and delicious" combination, according to the recipe author. It certainly looks promising!

The Lighter Side

Screenshot courtesy of PBS Nature/Youtube.

This footage of a male hummingbird trying to attract a female is absolutely stunning. Hummingbirds are amazing in general - they are the only birds known to have the ability to fly backwards, and they have the largest brain for their size of any bird species.

Click here or on the image to watch the video on the family-friendly website.

Your Resource for Real Estate
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Please give us a call today at (952) 442-1300 if we can be of assistance!
Have a great day,

Dennis and Jane Guertin
Broker/Owner, REALTOR®, CRS, SFR, CBR, e-PRO, GRI, BA
Guertin Family Realty

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