When a property market is thriving, flipping is all the rage! It is understandable though; everyone wants a profit out of an investment. Real estate is more lucrative than the stock market today. However, as flipping thrives, the government has sought to regulate this investment strategy. Before you embark on a property flipping venture; here are a few things you need to know.
Property Flipping Defined
Simply put, flipping is a process where one buys an undervalued property for resale at a profit. Normally, these properties are renovated to add value before being resold. The renovations need not be major; a simple refurbishment job is enough to make the property attractive to buyers who are willing to pay a higher price for it.
One of the reasons why flipping is so lucrative is that the buyers have a personal feel of the investment. Unlike other investment options such as stocks, the buyers can see the property and experience the neighborhood, which contribute to its general attractiveness. The trick to getting the most out of property flipping is to sell fast. You can always work with reputable companies such as Silverton House to get your property sold fast.
Wait a Minute, Are the Gains That Lucrative?
Well, fix and flip properties can fetch you quite a stash in profits. However, the venture also attracts up to 40%in taxes. The taxes are higher compared to those charged on rental income. It is advisable to thoroughly research about the current legal requirements in the locality you wish to buy fix and flip property.
Taxes Associated With Fix and Flip Properties
There has been an extra 3% stamp duty charged on flipped properties as from April 2016. This stamp duty is mainly charged on those who are selling a second or subsequent home. The charges apply whether the aspiring owner is an individual or a company. When purchasing property as a firm, the gains attract corporation tax, which is capped at a maximum of 20%. Other taxes that your property will attract include:
Capital Gains tax
This tax is that is levied on the gains realized from an investment including the sale of property. This means that all the income you get from flipping properties will be charged CGT. The capital gains tax can go up to 28%!
This is tax levied on the total income. This means that the total gains from selling the property will attract a further deduction! Personal income tax can take the largest portion of your gains as it can be up to 45%; that is overwhelming!
Flipping Properties with Special Purpose Vehicle
There are countless reasons why setting up a special purpose vehicle (a limited company) will make your property flipping a lot more profitable. Here are some of the reasons why flipping properties through a limited company is better than doing it as an individual.
|The limited company will limit the financial risks to the company; they will not extend to personal assets|
|The limited company allows you the luxury of trading devoid of joint venture partners|
|A limited company tends to attract a perception of integrity and is easily trusted compared to trading as an individual|
|Trading with a limited company is more tax efficient; the tax is capped at a maximum of 20% compared to the 45% personal income tax maximum|
The Government Changes to Property Taxes
Second home owners now face a potential hike on all second properties. This includes people who are struggling to sell their homes after moving in with their partners.
The government has planned a crackdown on all tax avoidance loopholes. This has in turn changed the rules that affect the property industry today. Unlike when one is selling a first home, the gains realized from selling a second and subsequent home is subject to a range of taxes, which include the capital gains tax. However, if you have ever lived in that home, you can apply for a tax break.
Previously, you’d be allowed to claim to claim tax relief for a period of up to the last 36 months of owning the property, even when you are not currently living there. The PRR (Private Residence Relief) was designed to give property owners time to sell and maybe get settled in their new home. However, property owners have misused this exemption to flip properties. They switched their designated main address so that they could avoid the prospect of paying taxes on a sale.
Property flipping is still one of the most lucrative investment options today. However, in order to maximize your profits, you need to consider the type of property you’re buying, the location, the amount needed to fix it up and the legal ways of paying as little tax as possible.