My first start would be to contact an agent that currently focuses on REOs, and ask how they got started. Thats a good question though, I’m not sure how one gets in to that niche? Maybe REO specific agents are former bank foreclosure managers?
No, you haven’t oversimplified it at all. In the U.S. we get all kinds of tax breaks for ownership and rental properties. The tricky part here, is attempting to give the owner a little cash for the sale. Since they are in foreclosure, the money belongs to the bank. There are some loop holes, but they require careful navigation.
It really comes down to the permit. If the job requires a permit in california then you need a license to perform the task. Most rehabbers work a fine line in this area, and just have sub-contractors pull permits when the job requires it.
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.
When I first started investing, I started reading all the books that I could get my hands on. I ordered a few late night investing courses and tried to digest as much as I could. I then started to look for anything I thought was a deal and started placing offers at a furious pace. I managed to get my first property under contract and then I proceeded to have a miserable experience with a lender that almost killed my deal
several times. I finally made it through the lending process and then I started to wonder how I was now going to take care of the needed repairs on this house. My repair quotes came in on average at $3,000 more than I had anticipated, yikes. I’m sure by now you can see where this experience was going, it was a costly experience, however I’ve been reminded that some of the best lessons in life you learn are ones you PAY for….well I paid handsomely for this lesson.
When I was finally “done†with that property and managed to get a tenant in place, I began to reflect back over the entire investment transaction and began to ask myself, how can I improve on this situation and process. I am a serial entrepreneur and so I have a strong “I can do it†attitude and I usually figure it is easier and less time consuming for me just to barrel ahead myself in doing a project instead of getting others involved. As I looked over the process, it occurred to me that there was a lot I still needed to learn, I couldn’t be in 100 different places at once, and that I needed to improve on my process if I wanted to make a profit, not lose my sanity, and grow my business of investing. I was fortunate enough that I had a close friend I had grown up with that was now expanding his small company from just painting houses to handyman services as well and so the next investment I purchased, I utilized him and even though I still had some of my other “nightmare†events that I experienced in my first purchase, I noticed that the rehab portion went smooth, on budget, and I had very little stress associated with that part of the investment process. A light then went off in my head!
Teamwork! How many times have we been told that teamwork always helps you accomplish more than on your own? It sounds so simple, yet I see so many new investors (and “old†investors) that decide doing it all on their own is the way to go. They don’t realize that taking the time to build a team, actually will help you streamline your investing, make it a more pleasant and rewarding experience and actually put more money in your pocket. I speak to large groups of people each month about Investing in Real Estate and it always amazes me how many people don’t even think about the importance of building a proper “Investing Teamâ€. With an Investment Team, you will be free to focus on your area of expertise, you will know that you are surrounded by INVESTMENT experts in their area of expertise, and you WILL get more accomplished, MAKE more deals happen, and MAKE more money!
Develop your Team and treat what you do like a business. You need to make sure you get an Investment Lender, hard money Sourse, Investor Minded Rehab Contractor, Attorney Proficient with Investment Closings, and a solid Property Management Company to really establish a strong base for your team. When you put all the right people in their “positions” of your team, you will be amazed at the results….the bottom line results.
6 posts found
luisest writes, May 16, 2008: (6 posts)
(Topic: Wholesaling / REO Agent sign up)
My first start would be to contact an agent that currently focuses on REOs, and ask how they got started. Thats a good question though, I’m not sure how one gets in to that niche? Maybe REO specific agents are former bank foreclosure managers?
luisest writes, Apr 12, 2008: (6 posts)
(Topic: Selling Talk / What Percentage of Agents are Investors?)
Something I’ve always been curious about. Do most agents practice what they preach? What percentage of agents invest in real estate?
I would love to hear opinions.
luisest writes, Mar 28, 2008: (6 posts)
(Topic: Foreclosures and Pre-Foreclosures / Is a Foreclosure Home For-You?)
No, you haven’t oversimplified it at all. In the U.S. we get all kinds of tax breaks for ownership and rental properties. The tricky part here, is attempting to give the owner a little cash for the sale. Since they are in foreclosure, the money belongs to the bank. There are some loop holes, but they require careful navigation.
luisest writes, Jan 17, 2008: (6 posts)
(Topic: Rehabbing through Construction / Do you need a contractors license?)
kapps,
It really comes down to the permit. If the job requires a permit in california then you need a license to perform the task. Most rehabbers work a fine line in this area, and just have sub-contractors pull permits when the job requires it.
luisest writes, Jun 4, 2007: (6 posts)
(Topic: Financing, Law and Taxes / Flipping Has Tax Consequences)
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.
luisest writes, Jun 4, 2007: (6 posts)
(Topic: Beginners or Bird Dog / Teamwork, the BEST Approach to Real Estate Investing)
When I first started investing, I started reading all the books that I could get my hands on. I ordered a few late night investing courses and tried to digest as much as I could. I then started to look for anything I thought was a deal and started placing offers at a furious pace. I managed to get my first property under contract and then I proceeded to have a miserable experience with a lender that almost killed my deal
several times. I finally made it through the lending process and then I started to wonder how I was now going to take care of the needed repairs on this house. My repair quotes came in on average at $3,000 more than I had anticipated, yikes. I’m sure by now you can see where this experience was going, it was a costly experience, however I’ve been reminded that some of the best lessons in life you learn are ones you PAY for….well I paid handsomely for this lesson.
When I was finally “done†with that property and managed to get a tenant in place, I began to reflect back over the entire investment transaction and began to ask myself, how can I improve on this situation and process. I am a serial entrepreneur and so I have a strong “I can do it†attitude and I usually figure it is easier and less time consuming for me just to barrel ahead myself in doing a project instead of getting others involved. As I looked over the process, it occurred to me that there was a lot I still needed to learn, I couldn’t be in 100 different places at once, and that I needed to improve on my process if I wanted to make a profit, not lose my sanity, and grow my business of investing. I was fortunate enough that I had a close friend I had grown up with that was now expanding his small company from just painting houses to handyman services as well and so the next investment I purchased, I utilized him and even though I still had some of my other “nightmare†events that I experienced in my first purchase, I noticed that the rehab portion went smooth, on budget, and I had very little stress associated with that part of the investment process. A light then went off in my head!
Teamwork! How many times have we been told that teamwork always helps you accomplish more than on your own? It sounds so simple, yet I see so many new investors (and “old†investors) that decide doing it all on their own is the way to go. They don’t realize that taking the time to build a team, actually will help you streamline your investing, make it a more pleasant and rewarding experience and actually put more money in your pocket. I speak to large groups of people each month about Investing in Real Estate and it always amazes me how many people don’t even think about the importance of building a proper “Investing Teamâ€. With an Investment Team, you will be free to focus on your area of expertise, you will know that you are surrounded by INVESTMENT experts in their area of expertise, and you WILL get more accomplished, MAKE more deals happen, and MAKE more money!
Develop your Team and treat what you do like a business. You need to make sure you get an Investment Lender, hard money Sourse, Investor Minded Rehab Contractor, Attorney Proficient with Investment Closings, and a solid Property Management Company to really establish a strong base for your team. When you put all the right people in their “positions” of your team, you will be amazed at the results….the bottom line results.