As to your tax question - Posted by John Corey
Posted by John Corey on March 15, 2006 at 10:16:44:
Capital gains tax kicks in after a holding period of 1 year. It is called ordinary income prior to the 1 year.
1031 tax deferred exchanges are for property that are held as an investment.
Buying, fixing and selling does not fit the investment property label. The property is more like inventory rather than property that you held as an investment. Hence the 1031 section of the tax code can not be used for rehab projects that you do not hold for 1 or more years as a rental after you finish the fix up.
If you do too many deals in a year (IRS gets to pick what that means and there is no specific number that will be used) they you are classified as a dealer for tax purposes. The sale of the property will trigger taxes in the year of the sale on the full value of the sale.
Now, if you want to buy, fix and then sell consider if you should be using a C corp or other structure. If the tax will be applied as if the profits are ordinary income you might get a lower rate with a corporate tax rate while having more expenses or benefits being paid before tax. You could set up a medical plan, have company owned equipments, and other expenses that a company can deduct but which you could not take as an individual. This also includes the ability for the company to pay into a pension plan at levels that might be higher than an individual could pay in at.
There are liability issues that the company can help with. Head over to the legal forum for some advice and look in the bookstore for William Bronchick’s into book on the topic. I can find my copy if you need a specific title.
Coming back to the basics though. If you found yourself in a high paying job that you enjoyed you would pay the tax and move on. Do not let the tax issues mess up the plan. Be smart but focus more on making money and a repeatable model rather than getting overly concerned about the taxes. As you work off the debt and find a cookie cutter model that works for you then you can optimize the structure and tax issues.