Posted by Tony Colella on May 24, 2007 at 06:41:21:
Cindy I can tell you are already sold on this idea despite our warnings to the contrary. I have always believed that value is in the eye of the individual investor and if you believe it is a good deal then it is one. I just want to make certain that you actually collect the profit you find to be a good deal. I have voiced my concerns that I do not believe you will but only your experience can prove either way.
One more factor I wish you to consider is taxes. You are flipping this home and when one buys with the intent to sell they can and at some point will be considered a “dealer” by the IRS which means that all profit is consider income in the year of that sale, even if you are taking a portion of your profit in the form of a note.
Sure you accountant might say this one will be ok to use the installment sale but as a business model, your plan will have you paying taxes on money you have not yet received.
So out of the $12k profit you will pay taxes on your entire profit, even that which is in note form. That means that at the end of the day you will not have $12k in cash left, you will have less and still have a likely worthless note that you are paying tax on.
Even if your accountant decides to take the installment sale on the note, you will have the tax to pay on the $12k right? So you will not actually have $12k left.
You mentioned that $12k plus a note is a good deal to you because you used none of your own money. This also means that in addition to your costs you have made mortgage payments that unless already factored in to your $80k will also eat in to your tax bitten $12k.
I will stop fighting you on this one and allow you the respect that once all factors are considered you will make a decision you are happy with. I just want to try and help you avoid the hidden costs of flipping that you may not have factored in to your profit/exit strategy.