How to pay less income taxes
I have been flipping houses since 2001 and every time on April 15th I had to cut a big check to IRS and the State until I realized that sometimes it makes sense to keep a property for more than a year and pay less in income taxes.
Here is an example: an average investor makes $20,000 on the flip, if he/she is lucky, bought a property for a good price, fixed it up and sold fast (managing contractors, buying materials, doing some of the work, which frankly I don’t recommend, unless you really like fixing houses).
Sadly, most of the real estate investors are always in the cash crunch, that’s why they are forced to sell their flips, so the rat race continues. However on $20,000 profit which typical investor makes, spending all this time finding, fixing and selling a property, an investor needs to pay on average 30% to IRS and 0-10% to the State in income taxes.
Thus a gross profit of $20,000 after 40% tax becomes only $12,000.
My question is: “Is it really worth it?”
Not many investors know, if they buy a property, keep it or rent it out for one year and one day and then fix it up and sell it, they will only need to pay long term capital gain tax of 15% instead of regular income tax of 30-50%. Thus from our example above on $20,000 gross profit, investor would pay only $3000 (15%) in income taxes and receive $17,000 net profit, which is 42% higher than the example where investor sells a property within 1 year from a purchase date.
All situations are unique and decision to sell within 1 year or more will depend on many factors. Please consult your CPA before you make investment decisions.