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FLIPPING, TAX CONSEQUENCES AND MORE
Real Estate Flip Deals
Real estate investors who quickly buy and resell properties, while declaring the
transactions under section 1031 of the Internal Revenue Service Code, could find
themselves being audited.
In these "like-kind" exchanges, investors can defer capital-gains taxes when
they sell a business or investment property by sinking the profits into a comparable
property right away. However, they cannot use the proceeds to purchase a primary residence
or vacation home.
Moreover, the profits must be put into an escrow account, not taken as cash. Naive
investors also risk being taxed at a rate of 35 percent, as those looking to qualify for
the capital-gains tax rate of 15 percent must hold onto their properties for at least one
Experts urge amateurs to speak with a CPA or tax attorney to ensure that they understand
the rules prior to making a real estate investment.
A recent study by First American Real Estate Solutions, meanwhile, shows why flipping has
become so popular. Those who flipped properties in Las Vegas, Miami, and Orange County,
Calif., within three to six months of purchase between 1999 and June 2005 achieved a rate
of return that exceeded the market appreciation rate by 20 percent to 40 percent.
Some Homebuilders Avoid Selling to Investors
Concerns about the impact of speculative buying on local housing markets are prompting
many residential builders to restrict investor sales.
"You don't want to sell [units], and then when you go to settlement, signs start
popping up all over the subdivision-sale, sale-that compete with the builder," says
Gopal Ahluwalia of the National Association of Home Builders.
A growing number of builders are prohibiting re sales within a certain time period or
limiting the number of units that can be bought by a single person. Hovnanian Enterprises
Inc., for instance, requires buyers to hold onto the property for at least one year,
terminating contracts and keeping deposits when violations of these terms occur.
Nationwide, the NATIONAL ASSOCIATION OF REALTORS® reports a drop in the number of homes
sold within a year of ownership to 3 percent in 2004 from 6 percent the previous year.
However, new research by First American Real Estate Solutions reveals that flipping is on
the rise in key markets: Orange County, Calif., Miami-Dade County, Fla., and Clark County,
The number of homes sold during the first six to 12 months of ownership in Miami, for
instance, rose to 11 percent of all sales during the first six months of 2005 from 8
percent for all of last year.
Source: Wall Street Journal (09/22/05)