Are you a flipper of real estate?

Flipping real estate, are you? Be careful. If you are an "investor-speculator", that is, someone who buys properties and flips them around by selling after a few months, you may be in for a tax wake-up call. The housing market of 2005 was a flipper's dream come true as equity wealth in real estate was easily realized. But flipping has a major downside for the uninformed.

Uncle Sam allows investors who hold on to their properties for 12 months or longer to pay capital gains tax rate on the profit when they sell. But Uncle Sam is not so nice to investor-speculators who hold on to their properties for less than 12 months. The federal government will tax the profit made from the sale of a home at a higher rate as regular income.

With the sizzling housing market of 2004 and 2005, a lot of novice investors became flippers not realizing the possible tax consequences this type of investing brings. This was prevalent in the new housing industry. Some novices bought new houses during the first phase of the development and sold them when construction was finished realizing an easy profit. Towards the beginning of 2005, many builders discouraged 'investor-speculators" by requiring buyers to sign an agreement that the property will be the buyer's primary residence and it cannot be sold or rented within the first 12 months after close of escrow. If buyers neglect to follow this agreement, the builders can collect a considerable fine and possibly pursue court action due to breach of contract.

Tax knowledge is very important when investing in real estate. I always advise my clients interested in becoming investors about the possible tax ramifications that comes along with real estate investments. The best advise I give clients is to have a good tax accountant they can consult with before executing purchase contracts. Being an informed investor will reap you profits that will allow you to build a very nice retirement nest egg.