I've spent the last <15 years being a buy-and-hold person. I was chatting with a friend this evening, who mentioned that I might consider some opportunities in his area. He's about two hours away from me, though, and I know how hard it is to manage stuff that's even half an hour away.

If I was to try to flip in his area--- I know enough to be cautious about it, but not enough to know how to maximize my results.

So-- I know that for short-term gains, for houses that are held for less than a year, profits are taxed like ordinary income. Is this also true for LLCs? Versus holding it in your personal name?

Suppose I buy a house for $10k, put $50k into it, and sell it for $200k. I get taxed on $140k, right?

I've been so focused on recycling all my income back into the biz, that I've never given myself an owner's draw or anything. I know that distributions aren't subject to self-employment taxes. So suppose I pay myself $x for my work on the house. Does that $x get subtracted from the $140k profit? How does that work? Because obviously, the IRS isn't going to let someone say--- "Oh-- I would have earned $140k--- but, oh, look, I gave myself $140k because I worked so hard--- no profit!"

I also know a little about 1031 exchanges. But if I have $140k to put somewhere--- but I'm only looking at another $10k house--- does it have to go to the sales price, or can it go towards that $50k renovation costs? If you're doing three, four, five, six of these in a row--- how do you make it make sense when you're ready to stop?

Don't try it now, with the current state of affairs. We have/had running for president a "Stupid", a "Liar" and a Thief. 80 Trillion in federal debt. Taxes going up next year.

Deanna,

If your LLC or copr pays you that is pure taxable income to you.

Medicare payments are based on your income.

I do 1031's because I detest paying taxes on MY efforts.

Adjust your thinking. Stair step up. When I sell a $140K prop I buy at $140K that's worth $240K after I fix it up.

Or you can take some as cash as pay tax on it.

You can buy plus repairs but it's complicated.

Also think multiples - I sold 5 homes to 3 different investors and 1031'd the money into one nice executive home that just needed fresh paint. I save 37% in taxes so I can afford to pay full price because it's like a 37% discount.

Or 1031 into an apt building.

Best: Do this prop in your Roth 401K and NEVER pay tax on it! Can cash out at age 59.5 tax free.

BRAD

One more thing to consider in this is that when you are doing rehabs a long way away is that you do not know the good or bad contractors in that area, the best places to get materials, where to get rid of the scrap, who keeps an eye on the place, who maintains the yard, etc. You will, unless you plan to drive or fly, need a third party to oversee this and that third party needs to be reliable, honest and really know their stuff. It's hard to find such a person or company.

Another thing to think about:

Instead of flipping the properties and paying tax, why not keep the properties and refi them, taking out cash (borrowed money currently not taxable) and use that to buy the next one. Just MAKE SURE the original property covers

all the debt and operating expenses.

If this is a one-time or occassional (once every few years) thing you can likely just do it in the same entity that you own your rentals in and treat the income as short-term capital gains, which would be taxed as ordinary income.

Tim is correct. As much as I am fan of 1031's, they are reserved for investment properties and not business properties. Flips are considered inventory.

Now I absolutely heard you say (under your breath) that you were considering a buy and hold on this property (this is where you shake your head yes)...... but out of the blue someone had cash in hand you elected to sell there and then. I absolutely know this to be true (this where I nod my head).

If you flip one place and do three buy and holds, you probably will fly under the radar. If you are doing half and half - the IRS is going to call you out. This is based on your intentions when you first bought the property. In any given year, I may sell five or six places and buy three others (typically more expensive). About every other year, I will roll (because flip is such an ugly word in the eyes of the IRS) to another investor. Occasionally, I will just assign them the contract, but normally I close on the place.