Documentation Needed to Avoid Paying Capital Gains on Flip (investment, sales, fees)

[mshenson]

I learned about a single-family home that was up for quick sale in Illinois, and I purchased it under a sales contract for $21K and closed on it under my name only. I gave an additional $3500 to have the person move out quickly. I then received money from friends/family a month later to pay for renovation costs in exchange for a small profit back.

I didn't set up any type of business or Tenancy in Common....I didn't even sign a loan doc for the $18K I borrowed. I am trying to find out what type of documentation I need so that I do not have to pay capital gains on the money I borrowed (or the interest I agree to pay them back) when I sell the home. I have a buyer interested but don't know what I need to do paperwork-wise. Can anyone offer some direction?

[willow wind]

You're confused- taxes are owed on profit, not on money borrowed. What you need to do is to get out pen and paper and figure out all the costs associated when you bought the home---- such as the price of the house, closing fees, real estate taxes,, attorney fees.

The write down all the costs associated with preparing the house for sale . This would include every penny you spent on the house fixing it up and you better have written documentation for every penny spent to back it up. To this figure add in utility costs, house insurance.

Add those two sets of figures together. Now figure out what you are going to sell the house for. Deduct your total costs from the sale price of the house . That figure is what is going to be taxes.

Lets say your house costs $ 21,000, you put in $ 18,000 in repairs and throw in number- let's say $ 4,000 for various other costs. Total of $ 43,000. You sell if for whatever, let's say $ 75,000.

$75,000 minus $ 43,000 is $ 32,000. $ 32,00 is your profit. On that amount tax is due.

You're not going to be taxed at capital gains-you're going to be taxes at the investment rate. It's high . .
Click on link and read the article on how it will be taxed. You should hire a good tax accountant to help you with this. Never depend on on internet board- you need professional advice. Since you did not set up a partnership or include your family as investors with you on the title, the entire tax bill is coming to you.

Whatever deal you have with them for splitting profit, interest, etc. has nothing to do with the IRS in
this case. And why would you think you're going to avoid paying taxes on profit? Talk to an accountant soon.

read the link
Capital gain tax on real estate sold and related IRS issues

[MrRational]

Originally Posted by mshenson

Documentation Needed to Avoid Paying Capital Gains

I purchased it under a sales contract for $21K
additional $3500 to have the person move out quickly.
(plus)renovation costs

I have a buyer interested but don't know what I need to do paperwork-wise.
Can anyone offer some direction?

Paperwork wise you need a sales contract with a sell price equal to or less than your investment...
then you won't have any tax liability.

Buy high and sell low and you'll NEVER have to pay taxes.

[Captain Bill]

I think you need to talk to an accountant.

[mshenson]

Thank you for the response....perhaps I came across as though I was thinking I could get away with making a profit and not paying capital gains. That is not the case. What I was trying to figure out is how to avoid paying capital gains on the profit that gets paid to my family/friend for loaning me the money. I agreed to give each 22% back, since that is roughly what they gave to me upfront to help out with this flip. I do have all receipts and can show all expenses to total the $18K so at least I won't have to worry about that. I will see out a CPA for guidance but am curious if you think I should get a loan document executed to show proof that I borrowed and have to repay?

[Captain Bill]

Originally Posted by mshenson

Thank you for the response....perhaps I came across as though I was thinking I could get away with making a profit and not paying capital gains. That is not the case. What I was trying to figure out is how to avoid paying capital gains on the profit that gets paid to my family/friend for loaning me the money. I agreed to give each 22% back, since that is roughly what they gave to me upfront to help out with this flip. I do have all receipts and can show all expenses to total the $18K so at least I won't have to worry about that. I will see out a CPA for guidance but am curious if you think I should get a loan document executed to show proof that I borrowed and have to repay?

The accountant can answer that question for you.

But just to add to this, I recently had an IRS audit, and I had to provide HUD-1's, receipts, and canceled checks.

So if you borrowed money and are audited by the IRS, they will ask to see the loan documents, plus canceled checks for the money you paid them back. You would also need an agreement with the people showing any profit you paid them (the 22% of the money) So I suggest getting all these documents together and then visit the accountant so s/he can help you make a spread sheet documenting all the numbers and place all the documents, receipts, and canceled checks in a package so you'll be prepared in case you're audited in the future.

If you paid anyone of these people $600 and more in profit, you will need to file a 1099 at the end of the year, and keep copies of that with your documents.