Posted by JOHNMAN on April 14, 1999 at 19:59:10:
Jim,
Whew!!! Thanks! I got confused there for a minute.
Johnman
TAX QUESTION (income made on a flip…) - Posted by johnman
Posted by johnman on April 14, 1999 at 17:28:19:
Hi folks,
I was discussing “flips” with a friend and she came up with a good question. The question is “how does the IRS know that you made a profit on a flip?” I didn’t know what to say about this because I don’t know the answer. Are there other forms to be filled once you assigned the property to another investor? All I know is you have a contract with the SELLER and the other piece of documentation is the ASSIGNMENT FORM that you sign with the investor you are flipping the property to. Please enlighten us on this matter.
Thanks everyone!
Johnman
Re: TAX QUESTION (income made on a flip…) - Posted by Jim Fletcher
Posted by Jim Fletcher on April 14, 1999 at 18:10:53:
Johnman,
When doing assignments, or wholesaling, all you have is an assignment of contract that the IRS knows nothing about at the point of assignment of contract. The assignment of contract shows how much the new buyer has paid for the contract the investor assigned.
When the new buyer, or assignee, closes, repairs, and resells, the basis will be what they paid including your assignment fee. It may not show up right away, but it will eventually.
When doing flips, or retailing, you actually take title to the property, repair if necessary, and when selling you actually have a closing. Since flipping is selling of property, not selling of your contract, there will be all sorts of paperwork at closing. When doing assignments, the selling of paper, only 1 document shows the amount paid.
My wife and I once paid an investor $4,000 for a contract (the investor assigned the contract to us) on a pretty house and the same day assigned the contract for $8,000 to an owner occupant who eventually got a loan on the property. It would be very hard at first for the IRS to know that we each made $4,000, but the new buyers basis on their property would eventually flush out what happened underneath by comparing basis of each seller and buyer. Granted, it is hard for them to know who and how much a person makes doing assignments, but it can be found out.
Jim Fletcher
jim.fletcher@celebration.fl.us
Re: TAX QUESTION (income made on a flip…) - Posted by johnman
Posted by johnman on April 14, 1999 at 18:44:03:
Jim,
Thanks for the response. I’m lost though with your thought on flipping. You said “When doing flips, or retailing, you actually take title to the property, repair if necessary, and when selling you actually have a closing.” The way I understand a flip is I have an agreement with a seller to purchase a property and I can “flip” (assign) this property to another investor. My contract will have the wordings "Johnman and/or assigns. Therefore there is no title transfer to me, no closing costs. Did I misunderstand you?
Johnman
Re: TAX QUESTION (income made on a flip…) - Posted by Jim Fletcher
Posted by Jim Fletcher on April 14, 1999 at 19:33:19:
Johnman,
I am sure we are both talking about the same thing. We are just using different terminology.
When speaking for Ron LeGrand, I have to be very careful in my terminology so new investors understand the basic concepts. When using the word flip, some investors use it interchangeably with assignment of contract or quickly reselling a house they have title to. Because these two techniques are much different, I have to use terminology so as not to confuse new investors.
If I say flip, some investors may think I am flipping a contract. Other investors may think I am flipping a property I have taken title to. One is wholesaling the other is retailing. When my wife and I started, we wholesaled, or assigned contracts. This is the fastest way for beginners to make quick cash and learn while you earn. Later, after much study of Nick Koon, Charles Givens, etc and learning how to raise money and present owner financing, we began taking title and quickly flipping properties. Two separate strategies and techniques that can be confusing to some. Not saying that you are, but beginners seem to have the most confusion in this one area than any other area.
The difference in terminology helps beginners understand concepts better and helps to define what part of the business they are in. We only do assignments now, whereas more money is made flipping properties.
Jim Fletcher