How Much in Taxes do you Have to Pay on Fix and Flips?

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  • Mark, thanks again for a great article. Sometimes it’s hard when flipping to keep the end in sight. I told a fellow flipper that I was using a hard money lender (as that’s what I can get right now), and he said, don’t they keep all the profits. I had to remind him that if you buy right, get in and get out, it’s what you keep that you should be worried about, not what you pay them. If you don’t purchase correctly, and your margins are too slim, then they may eat up all the profit. Again, thanks for a great reminder.

    • Mark Ferguson says:

      Many flippers do great with hard money. Like you said as long as the margins are big enough you can still make money with them.

  • It doesn’t take too long to burn up $10K holding a property. In the ‘old’ days, the house value was falling faster. Taxes, HOA dues, interest or opportunity costs, insurance, utilities, etc. all add up quick.

    An holding the property, especially if it is vacant, entails a high level of risk due to vandalism, etc.

    • Mark Ferguson says:

      Good point about the increased risk of vandalism!

  • Jon Humboldt says:

    Mark, have you thought of using an offshore holding company as a tax blocker, ie. a Cayman islands entity, so that you can increase your tax efficiency? I know of many funds going down to 10-13% net effective tax (you still have to pay some tax to the IRS) by having a shareholder’s loan from the Cayman entity to the US entity and writing off profits with a interest rate (which is tax-free).

    Let’s say you made 60% net cash-on-cash return (assuming $50,000 per property in upfront costs, and $30,000 in profit). Let’s say you’re flipping 20 houses, so $50,000 x 20. You “lend” that amount to the Cayman entity, with an interest rate of 30%. So you get your principal back and 30% return tax-free. The other 30% you pay 35% tax on (assuming you’re in the same tax bracket). So you’ve halved your net effective tax rate to 17.5%. I think that would be a conservative way to decrease your tax burden without setting alarm bells off at the IRS (you’re still paying some taxes).

    Would you consider such a structure? I’m a fellow flipper not an accountant, but I think you are getting to a size where it would make sense cost-benefit wise.

    Thanks.

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