Do you want to know how to maximize your investment profits and minimize your taxes? Read the following article which talks about the best ways to do so. You’ll be glad you read it because you may end up learning something to save yourself some money.
The surge in foreclosures, which nationwide have reached 2.9% of total serviced mortgages, has created many opportunities for real estate investors interested in flipping real estate to buy and flip foreclosed houses. Particularly adequate for the current market could be the so-called “fix and flip” strategy, in which investors purchase foreclosed homes at major discounts – either due to the house’s condition or due to the owner’s urge to sell the house promptly – and flip these homes for a maximum return within a few years. In fact, this strategy could be considered the most adequate for the current market. However, in addition to flipping properties at the right price for a sizable gain, maximizing return on investment should also include minimizing taxes on capital gains.
Some investors could also fall into a trap of buying a property and selling it too quickly. In fact, opportunities for this kind of flipping are limited in today’s market. However, maximizing gains on a flipped property is not only about getting the highest possible price on the house, but also trying to minimize capital gains taxes for the optimal return on investment.
Therefore, real estate investors who want to flip a house for the optimal return should hold a property for at least a year in order to qualify for the 15% capital gains tax rate. As property prices continue to decline in most local markets, the current market conditions in most local housing markets are unlikely to provide an opportunity to flip a property within a few months and realize a significant gain. However, fixing-up property and holding it for at least a year until an opportunity arises to flip it for an attractive profit could prove as a smart investment choice.
One of the tax provisions many real estate investors who flip properties have used is section 1031 of the Internal Revenue Code, also called “like-kind” exchange. Under this section, investors can defer payments of capital gains taxes by rolling their capital gains into a similar piece of property. They have 45 days to identify a suitable property and 180 days to close the transaction. Investors cannot take hold of the sales proceeds from the flipped property, but must place the proceeds into an escrow account until they find a suitable replacement property.
An even greater advantage is available to those real estate investors who chose to use the house bought for flipping as their primary residence for at least two years, within a period of up to five years. In this sense, they can avoid tax liability for capital gains of $ 250,000 for an individual and $ 500,000 for a married couple filing jointly. With fixes and remodeling on the investment property, investors could achieve a sizable tax-free profit in a reasonable investment timeframe.
Savvy property investors know that flipping real estate properties involves not only the strong drive to earn a quick profit but also a full understanding of the local market conditions and tax considerations that have to be assessed in order to achieve the optimal return on property investments. All property flippers should seek professional counsel from their accountants or tax lawyers in order to understand the available options to maximize gains on flipped investment properties. By doing so, investors will have the right knowledge to make the right investment choices that can yield optimal returns on their investments.
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