Real-Estate Flip Deals Have a Catch

By: Colleen DeBaise: REALTOR® Magazine Online
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 year.

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.