Posted by Laure on December 19, 1998 at 05:22:18:
Redline is accurate.
Is it true that . . . - Posted by Lette
Posted by Lette on December 17, 1998 at 12:39:54:
. . . you are taxed on the profits you make when you flip? I was just speaking with someone who’s been in real estate for over 15 years - but he tells me that what I want to start out with (flipping) is nothing more than hustling. He says that as soon as you assign a contract, you’re taxed on that money. I value his experience, but frankly I don’t think that he knows as much as I’ve learned being taught right here on this very site. I think I have more knowledge in 3 months than he has over 15 years. Though he may definitely have more wisdom.
He tries to make me understand that I need to get alot of properties and lease them out so that I get that constant cash flow. I think this is a great idea also, but I don’t want to have so many properties that I’m still always in debt. About an hour ago I order Ron LeGrand’s course on Quick Turn - and right after that I talk to my friend who says that the flipping business is not the best way to go.
I value hearing from experienced people. But I don’t like being confused and discouraged. Who does?
Any way, I guess what I’m asking is - am I really going to be taxed on my flips?
And flipping contracts doesn’t make me a hustler either.
Thanks for your comments.
Dang, hustled again - Posted by hk CA
Posted by hk CA on December 19, 1998 at 13:15:34:
“I was just speaking with someone who’s been in real estate for over 15 years - but he tells me that what I want to start out with (flipping) is nothing more than hustling. He says that as soon as you assign a contract, you’re taxed on that money.”
Your friend makes some disturbing comments. I would be interested to know the reasoning behind his theory about hustling. He may be successful in the area of RE that he practices, since he’s been doing it for 15 years, but he is using tunnel vision when he advises you about investments. Try this: Ask him how he feels about using lease/options, lease/purchases, and options to purchase to make deals. My bet is he’ll tell you the same thing . . . that you’d be hustling. Most likely, he has used the traditional means to buy and sell property and it has been relatively effective for his needs. But he has failed to explore the many other, more creative means (which we all here are interested in) in which to make RE work for us. You would be well advised to look for someone more open-minded to give you guidance in the beginning.
And I assume that in the comment about taxes, he was referring to the fact that with certain RE investments, the taxes can be deferred for years and in some cases, exempt altogether. But is he telling you that if you have a chance to make money immediately, you shouldn’t because you will have to pay a tax on it? Great reasoning.
The post from MichaelR (NoVA) below has a lot of wisdom. That advice will provide you more benefit than the advice from your friend.
Unfortunately, as in any encounter, there are unethical people. Some will take unfair and selfish advantage of others when doing flips. But there is a warm satisfaction in doing it right . . . where everyone comes out a winner.
Re: Is it true that . . . - Posted by JHyre in Ohio
Posted by JHyre in Ohio on December 18, 1998 at 12:35:33:
See my response to John Katitus re dealer status. The same applies to your flips. See Bronchick’s articles on flipping and why corporations are usually the best vehicle for this. Redline’s installment sale answer is on the mark for sellers who are NOT dealers.
Ditto everyone else on flipping is not hustling. Whatever your friend does for a living, I’ll bet it ain’t for free. He probably charges as much as he can- why shouldn’t you?
Good Luck!
Re: Is it true that . . . - Posted by Rob FL
Posted by Rob FL on December 17, 1998 at 20:34:39:
The buy and hold idea is a good one. Rental properties can be very profitable. But unless you already have a good nest egg (ie CASH in the bank), you need to get a hold of some cash. Rental properties normally don’t put cash in your property, generally they give you minimal cash flow in the beginning and increasing cash flow and hopefully appreciation in the years down the road. It is a much better idea to generate cash (via lease options, flips, etc.) in the beginning to get you financially established.
BTW, does your local 7-11 have cows in it dispensing milk? No 7-11 buys from the local dairy who buys from a farmer who milks the cow. And I guarantee you that 7-11 does not sell their milk at cost, if they did they wouldn’t make a profit and would quickly be out of business. Does this make 7-11 a hustler? It sounds like your well-meaning friend would think so (from his own definition) Whoever gave you this advice was really speaking without thinking.
Happy Holidays.
Re: Is it true that . . . - Posted by Cesar
Posted by Cesar on December 17, 1998 at 15:37:41:
Income is income no matter how you slice it.
The deal here is to MINIMIZE your taxes and pay only what is “fair”, not to EVADE taxes. The best thing to do is incorporate, and treat this like a business, because IT IS!
I believe there are many articles and posts on this website that explain this, and I am sure that Bronchik has a whole course on this subject. Catch up on your reading…
Good Luck
Re: Is it true that . . . - Posted by MichaelR (NoVA)
Posted by MichaelR (NoVA) on December 17, 1998 at 14:26:18:
Everyone else has hit the tax issue, so I’d just like to offer a few observations. This is semi-relevant to what you posted…but I feel like a little vanity posting today. 
I definitely consider flipping (only) a job, not an investment. My criteria for the distinction is simply this:
If I stop doing the activity, will my income also stop?
That’s not a book definition, and it certainly isn’t written in stone. It’s just a representation that I’ve found to be useful in my own decision making process.
With that said, I really hate jobs. But, sometimes they are a means to an end. Any kind of “dealmaking” could be catagorized as hustling…the question is are you happy doing it and do you make enough money at it?
Buy and hold, lease options (although not as long-term), paper, and other aspects of RE fall under the investment group for me. I like this group primarily because I really dig vacations. Your milage may vary, but I suspect that they may hold value for you, as well.
There is nothing wrong with a “job.” Enjoy having the “freedom” that being an entrepreneur offers. (To those of you full time flipping, or who have owned other businesses will understand why I put freedom in quotes.) But your friends advice is valuable for when you want to spend some time on an investment, as well. I hallucinate that he may have been referencing this distinction, whether intentional or not, when he gave you advice as to what he thought you would be best doing.
Now, I haven’t been investing in RE for a long time, but I have owned several successful businesses and have been an entrepreneur all of my life. I would recommend the following actions:
#1 Scr*w what everyone else says you should do.
#2 Sit down and decide where you will be 5 years from now.
#3 Work backwards to find out how you got there.
#4 Start putting it to work, always noticing the feedback you are getting from the actions you take.
#5 Don’t keep banging on a wall when there is a door in the room. I’ve seen more people than I care to count keep doing the “plan” and wondering why it doesn’t work. Doing the same thing over and over, regardless of whether it works is called CRAZY.
Once you make that plan, be flexible in how you approach it, but don’t let other people knock you off the path.
As to how I feel about all this… I think flipping is a great way to gain knowledge of your market, the way REI works, and how other people make their money. At the same time you are doing that, you can be on the lookout for other profitable, and possibly long-term, things such as L/O’s…rehabs…or whatever. This is the route that I am taking, and I’ve been happy with the scenery so far.
Joe Kaiser wrote a great article somewhere saying that he doesn’t look for houses any more, he just looks for situations - meaning motivated buyers. He just sits back and makes $$$ by knowing how to solve their problems. Sometimes it may be a flip, sometimes it may be a L/O, sometimes it may be a partidge in a pear tree. I think that’s a useful way to be. Flexible and laid back.
DISCLAIMER: I may have completely misrepresented that article. I’m going from a memory which has been known to have a lot of glitches.
I hope there is something of value in this post for you. I always go by the rule that anything which makes you go inside and evaluate your current path and options is great.
But what do I know?
Michael
Poverty Mentality - Posted by Mark R in KCMO
Posted by Mark R in KCMO on December 17, 1998 at 14:08:21:
Lette,
Your friend seems to be showing his poverty mentality, and it is hendering his views.
I assume that he thinks that any wholesaler or distributor is hustling thier customers?
Is a retailer who buys direct from the manufacturer the lowest scum on the planet?
Your Profits are taxable in the year that they are generated, and the key thing to note is that he is showing you that your plan will generate profits.
Yes you will have to buy and sell to keep generating profits, this method will force you to have personal knowledge of the values in your area, it will force you to know a deal from a dud, it will force you to develop a keen eye and to know not only what is going on in your market, but to also know who is doing it.
It will give you access to the best properties once you choose to keep a few for rentals or leases.
If he chooses to not buy because you are the wholesaler, then from a business stand point he is illustrating he only likes skinny deals and is counting on inflation or other factors to provide him with income and profit.
It appears that he has missed one of the foundations of investing.
Your profit is made when you buy!
Hope this helps
Mark R in KCMO
Re: Is it true that . . .yes - Posted by Dave (CA)
Posted by Dave (CA) on December 17, 1998 at 13:38:07:
Lette,
I’m not a tax expert, but if you earn a profit from flipping a property, that is going to be income as far as the IRS is concerned. Now whether they know about it is another issue. Personally, I would claim any money earned this way.
I see nothing wrong with flipping. To me it isn’t hustling, it’s using your knowledge to put a deal together. That’s how business works. You buy something and resell it at a higher price.
Dave
Re: Is it true that . . . - Posted by raelynn mitchell
Posted by raelynn mitchell on December 18, 1998 at 13:44:49:
Keep in mind the following:
Individuals with a pulse are taxed on income. Corporations are taxed on PROFIT.
raelynn
Action #5 amended… - Posted by Soapymac
Posted by Soapymac on December 17, 1998 at 14:42:13:
Michael,
“#5 Don’t keep banging on a wall when there is a door in the room. I’ve seen more people than I care to count keep doing the “plan” and wondering why it doesn’t work. Doing the same thing over and over, regardless of whether it works is called CRAZY.”
The corollary to this action is:
“Doing the same thing over and over and expecting different results…is a perfect definition of insanity thinking.”
And don’t we all meet them?
Sorta like MacLean’s corollary to Murphy’s Law.
Murpy’s Law states that anything that can go wrong…WILL go wrong…and at the worst possible moment.
MacLean’s Corollary states that if there a a thousand ways to do something right…and one…AND ONLY ONE…way to do something wrong…that I will find the wrong way…FIRST.
Soapymac
Re: Is it true that . . .yes - Posted by Berwyn
Posted by Berwyn on December 17, 1998 at 13:50:59:
This brings up a related question. I was talking to a seller about possible seller financing, but he was concerned about getting hit for all the taxes at once. Of course when someone sells a house for cash, the income has to be declared in the year it is received. What happens with a contract for deed or a purchase money mortgage? Does the seller have to pay taxes on the whole shebang in one year, or does he declair the income for the years the payments are actually received?
There’s something in the Sheets course about having to declare all the income at once if youre a “dealer”, but it doesn’t really addres the other issue.
Thanx
No! - Posted by Redline
Posted by Redline on December 17, 1998 at 13:55:52:
No. When sellers sell their property with a note and take cash over a period of time it’s called an “installment sale” and the gains they recognize don’t get taxed until they are recieved - in installments.
Make sure your sellers know this. I’ve often seen this confused and even talked to an accountant once who DIDN’T GET THIS! This is one of the key selling points: taxes spread out over time.
RL