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The Financial Considerations of Flipping Property
People often fantasize about making loads of cash from a house flip but
forget the fees and taxes which are charged in conjunction with the process.
Although it’s easy to ‘blink dollar signs’ when considering a flip’s
profitability, a typical flip needs to increase in value by about 10% for the
flipper to make any gains. Thus, when considering the cost of a flipping
property, it is not just the purchase price which will set you back. To
determine an appropriate budget for flipping, here are some costs to be aware
of:
Taxes
Every Province and State has different taxes that they apply to real estate
acquisitions and sales; therefore, it’s difficult to describe the specific tax
implications of flipping houses within your area. However, to get a general idea
of the taxes incurred, here are some general situations:
Pre-sale
Sometimes a state or province will apply different taxes when someone buys a
pre-sale versus a physical property. As a result, pre-sale homes, apartments or
condos can be susceptible to federal, state or provincial taxes.
Property Transfer Taxes
In some locations, property transfer taxes or their equivalent can be charged
when moving into a place for the first time or when moving from one place to
another.
Capital Gains
Some flippers choose to flip within 6 weeks to 3 months, whereas others prefer
longer periods. One factor to help determine a flip’s timeframe is capital gains
tax or its equivalent. Because government policies are always changing, talk to
someone who is knowledgeable on real estate taxes to determine what percentage
you’ll be charged on your gain. Note that there are some ways to use these taxes
to your advantage. For example, if you occupy your property for a year, in some
areas, your flip could be designated your principal residence, thus, exempting
you from paying this tax.
Fees
The two most prevalent fees associated with the purchase and sale of a property
are legal and lending fees.
Legal Fees
Whether buying or selling a home, a lawyer has to be involved in the
transactions and paperwork given the contractual nature of the deal. Lawyer fees
vary by project. On residential flips, legal fees can be anywhere from $500 -
$2000 depending on the area.
Financing Fees
In addition to legal fees, some lenders may charge various fees associated with
the processing and placing of the mortgage.
Ultimately, the taxes and fees paid above and beyond a property’s purchase price
increase the cost of buying a home. Therefore, when preparing to buy or sell a
flip, keep these costs in mind and work them into your budget.
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Free e-book
A practical beginner's guide to assist in making your home flip a success.
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