Is The House Flipping Hype For Real?
House flipping is hot -- to the point where more than one
successful reality TV show has been created to feed the appetite
of up and coming house flippers. But does the reality of house
flipping measure up to the hype?
House flipping TV shows have met with huge success because they
speak to many homeowners' aspirations to make it big in one of
the few areas they have some control over. "Buy it cheap, fix it
up, and then resell it for a large profit", sounds like
something anyone who can "work smart" is capable of doing.
But there are problems. One of the big ones is that
do-it-yourself renovators often do not realize the renovations
they plan to do require permits and inspections. In some cases
their renovations can be halted by unhappy neighbors disturbed
by the noise and unusual activity next door.
Flipping hype also leaves an unrealistic impression about the
amount and complexity of the renovation work required in order
to make a significant profit from a resale. Real estate experts
claim there is simply no way a house can be improved enough in
two or three weeks to bring in $50,000 or $75,000 above the
original purchase price.
Flipping accounting is also pretty suspicious. We've all seen
those less-than-$2000 renovations completely transform a home on
TV. But the reality is that real renovations often cost much
more than these shows lead us to believe.
Profit calculations made by flipping hypesters often leave out
some pretty crucial information too. Simply subtracting the
final selling price from the initial purchase price may look
impressive at first. But this often completely ignores the full
costs of renovation, permits and inspections, not to mention
real estate agent fees, legal fees, and taxes.
**Don't Ignore House Flipping Tax Issues
If you're thinking of doing some house flipping, be prepared to
wrestle with some pretty serious tax issues. The general
impression of house flipping (buying cheap, renovating, and
selling quickly for a profit) is that your average person can
turn a hefty profit without having to worry about the tax man.
But the truth is, in the U.S. and in many other countries,
profit made on selling houses is taxable income unless it is
your primary residence.
According to Bill Rucci, a CPA specializing in real estate
investing, many real estate investors are completely uninformed.
"There is a huge misconception on the part of some people who
think they can buy a residential home, not necessarily their
personal residence, fix it up and then sell it and then get what
we used to call the old rollover provisions where you use the
money you made to buy another piece of property for more than
what you sold," says Rucci.
But according to Rucci this only used to apply to personal
residences. But more importantly, these regulations no longer
apply even in those cases. They have been replaced by more
sophisticated, more restrictive legislation.
Current IRS legislation makes a distinction between owning a
home as a personal residence, and owning a property for
investment purposes. In order to qualify as a personal
residence, you must live in a house for at least 730 days (2
years) over the last five year period. In that case, profits
made on a sale after the 2 year residence period are tax free on
up to $250,000 profit.
But if you own a home for investment purposes (as most would-be
house flippers do), and do not actually live in it, you could
pay as much as 35% on the profits. Hold it for more than a year
and the IRS will consider it a longer term investment. In that
case profits will be taxed at the long-term capital gains rate
which, in most cases, is a maximum of 15 percent.
Either way, it is pretty clear that the IRS does not look kindly
on house flipping.