Flipping Exchanged Property?

Flipping Properties

Before we start into that subject, let’s cover a basic rule. Tax deferred exchanges are for Investment Properties. The legal definition of investment properties is “Real estate held for productive use in a trade or business or for investment.” What does that mean in laymen’s terms?

Let me make a confession to you. Although I work very closely with a team of attorneys, I myself am not an attorney or accountant, so I personally have to do that conversion for myself. Hopefully that also means that that I can be more clearly understood.

I have found it easier to explain investment property as property that you create income on (like a rental), operate a business on (like commercial property), or hold for appreciation (like raw land). An investment property cannot be your personal residence or second home.

From that, it almost sounds like flipping properties would be no problem. But, the IRS doesn’t feel that way.

Inventory

Usually when talking about real estate, “inventory” means how many homes are available to purchase; but when talking about taxes, you are talking about the purchase of something with the intent to resell. Think about a grocery store. It purchases inventory at wholesale prices to re-sell at retail prices, which is taxed as income. The IRS determines that real estate purchased with the “intent to sell for a profit” is taxed as income. So unless property is purchased with the intent to create income or hold for appreciation, it is considered to be inventory, and when sold, and is taxed as income, not investment.

Intent

How do you prove your intent? You have to prove it with fact patterns. There is also no official “holding period”, but that can contribute to a fact pattern that would prove your intent. So, if you want to go over any specific scenarios that you believe would show a fact pattern that would prove your intent was to purchase and sell investment properties, give me a call and we can walk through them. There are certainly plenty of situations that would work in an exchange if it is planned in advance. Time heals most wounds, as long as you don’t wait too long before to talk about them.

Let’s Talk about Your Situation

These are all examples of why you should come in and talk with attorneys well before entertaining the listing or accepting of an offer on the property.

Today's blog courtesy of Kevin Hummel, CEG®

Certified Exchange Specialist®

Tax Deferred Exchange Practice Group

McFerran Law, P.S.

Happy Investing!

Direct Mail Marketing

Want to find great properties to buy?

Then network with a purpose.  Let everyone you know hear about what you are doing. A narrow focus will generate more deals.  If you say you do everything you are just white noise.  Your 30-second elevator speech should explain who you are and what you do, to create exclusivity with a hook. Your goal is to find the most creative deal makers in any crowd.  This works for finding sellers, buyers, properties, and money lenders.

Direct mail is another powerful way to generate leads for real estate investing. It tends to be more expensive than many other methods, but the return is often much greater. There are several caveats and tips in using a direct mail campaign as a primary method to find prospective sellers of investment real estate - most importantly, the message to the market must match what you need.

For example, a simple "handwritten" letter may read something like this:

My name is Angelique, my husband and I are looking to buy a house.  If you want FULL PRICE for your home, please call xxx-xxx-xxxx. Get full retail.  

Thanks, Angelique 

Ps. Looking forward to your call.   

Each letter should contain a "hook," and a call to action. If the investor has a real estate license that should be disclosed, but make it clear that buying rather than listing is the intent here.

The best responses tend to come from letters sent in invitation- rather than business-size envelopes. The envelope should be hand written, with a crooked stamp, for best results.  It helps to mail more frequently to a smaller list. For example, send a letter every 5 days,  for a total of 7 times (35 days). These might be four yellow letters with slightly different wording each time, perhaps one simple postcard, one hand written memo, and one traditional letter typed.

If the investor is looking for seller financing, it would be good to do a search of prospects using the following terms on multiple listing services, or online websites such as Zillow, Craigslist, and FSBO.com:

"Owner terms" "creative" "finance""seller terms" "owner finance" "owner will carry" "owners do finance" "monthly" "motivated""bring" "lease option" "take over" "to own" "two tax" "three tax" "four tax" "two lots" "three lots" "four lots""two parcels""three parcels" "four parcels" "No low ball offers, no brokers, serious inquiries"

Use appropriate lists depending on the type of property being searched: are you looking for residential single family? or multifamily? How many units? 

Make sure your list matches the criteria set on property prices. For example, if you are looking for the best rental market you may want to set the maximum price for a single family home as average median price+ $25,000.  Maybe you want a minimum of two bedrooms. Be sure your list contains all of your specific buying criteria.

You may be able to get lists from your local title company, or perhaps from a list purveyor such as ListSource.com

My next blog will focus on making offers.

Happy Holidays! Happy Investing!