To Flip or not to Flip?

There are advantages to flipping houses, however, there are undeniable risks along the way.  Regardless of the type of "flipper" you are, the deliberate analysis of the house that is going to be bought, its location, the existing damages, the needed repairs, the tentative span of time for it to be sold and of course if there is a ready & willing buyer should be the primary concerns of the "flipper". 

There are basically 3 different types of Flippers;

1. Multiple investor flipper -  one investor purchases low and sells to another investor at a price the investor/purchaser can still have an upside
2. Real estate flipping proper - the investors sells directly to a buyer that is not an investor
3. Fix & Flip - involves having to do improvements on the property before it is sold.

Mortgage information - If you are taking out a mortgage to purchase a house to flip, note that FHA has extended the anti-flipping Wavier through 2012.  With certain exceptions, FHA rules prohibit insuring a mortgage on a home owned by the seller for less than 90 days.  The new extension will permit buyers to continue to use FHA-insured financing to purchase properties. The Waiver contains strict conditions to prevent the predatory practice of property flipping, in which properties are quickly resold at inflated prices to unsuspecting borrowers. The Waiver continues to be limited to sales meeting the following conditions:

• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction;
• In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the Waiver will apply only if the lender meets specific conditions, and documents the justification for the increase in value; and
• The Waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Tax Consequences - SEE YOUR TAX ADVISOR. 

As far as the IRS is concerned, buying and selling real estate as an investment strategy and doing it as a business are two very different things. If you buy a house, fix it up and resell it while you're working another full-time job that provides the bulk of your income, that's an investment and the proceeds will be taxed as short-term capital gains (if you own it for a year or less) or long-term capital gains (if you own it for more than a year). A short-term capital gain is taxed at the same rate as your ordinary income. A long-term capital gain currently is taxed at 15% of the gain.  If you're doing it year-round that's a business and the IRS might consider you a dealer-trader.  Then your gain will be taxed as ordinary income no matter how long you own it, the real estate taxes and interest will be regarded as an expense and you'll have to pay self-employment tax of 15.3%.

By Carmen Villarma

President

The Management Group