Day Three – make it worth my time…
Ok, this is another idea from John Adams and a talk he gave that I attended. His point was that investors are looking for profit and the ability to fund transactions to rehab. Per current rules, it is very hard to get a loan to rehab a house and then sell it at a profit. There are limits on the number of loans an investor can have. Hard limits regardless of the ability to carry the debt and the taxes on the profit are very high.
The idea is asking for something like a 60% loan to value on the purchase to ease this requirement and I would agree that this is reasonable for the savvy investor. This is not of everyone as debt = risk but if you are able to take on the risk then maybe this works for you.
The second part of this is profit. If you do this as a business (buy, rehab, sell) then HALF of your profit goes to taxes. Yes, half. You have to pay 28% capital gains, 6% state and 15.2% self employment tax. That adds up to 49.2% in tax which is so close to half it does not require argument.
The idea here is if an investor buys a house that is trashed, needs appliances, carpet, paint maybe a roof and can’t be sold under FHA guidelines and makes it FHA financiable, and then sells it within 12 months its profit would be tax free.
Tax free perhaps from a Federal perspective would be a good compromise leaving the State to benefit from the activity but the State already benefits in the form of lower unemployment, material sales that are taxed, fewer abandoned homes in need of repair and a faster market with fewer distressed houses to sell. It would also begin to increase the values of the houses and that raises the property tax collected in the long run.
Sounds like a winner to me. How about you?
One note about the taxes, if you hold the property more than 12 months the tax burden drops tremendously. Capital gains goes to 15% and the self employment tax disappears completely as it would no longer be considered your means of employment. I think that is reasonable as taxes are in fact necessary in our economy and at this level are not a huge burden on the active investor. He would be motivated to price the completed project to sell and that is good for the market and would certainly be a good deal for everyone.
That’s it for today. Stay tuned for the next one. Day Four will be about a holiday.
Thanks for listening,
Jerry Robertson
678-231-1578