Flipping houses?

Many investors buy run-down houses, fix them up and sell them for a profit [a happy day]. Is that called a flip? Well, if it takes less than a year and a day we call it a flip. The time frame determines the tax strategy. Longer than a year and a day would be taxed as long term capital gains (15% in 2005) and you would be able to claim some depreciation.

Any shorter time frame falls into short term capital gains which are taxed at your highest income tax rates as active income and there is no depreciation >groan<.

One way to manage your taxes would be to separate this income into active and passive portions through the use of a Limited Partnership (LP). Since an LP does not exist alone, but needs to have a General Partner (GP), you can decide how much goes to the GP and how much goes to the LP. The LP only receives passive income and the GP receives active income (by IRS definition). Frequently the GP is a "C" company or corporation and would only take a small percentage of the profits as compensation for managing the partnership. One GP can manage many different LPs, so an investor can partner with many different groups and "re-use" the same GP.

As the GP accumulates cash (as a "C" it only pays 15% on the first $50,000 net income) it is able to invest as its own person since a "C" tax election is the only entity that files its own tax return and can act as a separate legal "person".

Somebody find a brush - I'm shedding all over the keyboard. Bye for now