Flippers generate business for accountants, tax attorneys
By Suzy Valentine
Condo flipping is providing business for accountants and tax attorneys advising clients on becoming tax-efficient.
To qualify for capital-gains tax breaks, homeowners who are primary residents must have lived in their properties for two of the past five years, after which an individual pays up to 15% on any gain exceeding $250,000. Married couples qualify for a $500,000 exemption in appreciation.
"It has to be your main home," said Coral Gables accountant Oscar Hernandez, who's been in the business for about 20 years. "There is going to be a benefit for the Internal Revenue Service from the explosive real estate market in Miami-Dade County. I've been advising on tax since 1984, and I'm seeing 30% more people consulting me about capital-gains tax than in previous years."
Those buying properties as investments have a year and a day to hold onto the asset before it qualifies for capital-gains tax. The penalty for flipping early is to pay tax on a gain at income-tax levels, one property specialist said.
"It's a logical reason for speculators flipping," said Hank Rodstein, president of HR Mortgage and Realty. "They want to sell early and flip but avoid liability to pay, say, 35% - or be taxed at their regular income-tax level - on the property. It's the major reason that sophisticated brokers get out."
Michael Cannon, managing director of Integra Realty Resources-South Florida, said not all investors are aware of the pitfalls.
"I suspect that most of these people aren't sufficiently sophisticated to know of all the liabilities," he said. "Those who don't consider tax liability and Realtor fees may have any gains they accumulate wiped out."
Investments held for one to five years are taxed at 20% on the gain - lower if the holder pays income tax at 15%. The gain on an investment sold after five years is taxed at 18%.
Mr. Rodstein, who has bought at Murano and Neo Vertica among others, said investors may feel under increased pressure given fears of a downturn in the market in 2008.
A spokesman at a Washington think tank said developers, investors and speculators are tax-savvy and can avoid liability though they would probably consult their financial advisers more regularly.
"The whole industry has shed a lot of tax over the past few years," said Chris Edwards, director of fiscal policy at the Cato Institute. "Real estate investment trusts are one means by which investors can avoid liability. They aren't subject to the same tax restraints that a traditional corporation might be. Office developers and shopping-center owners are using this method of tax-efficiency."
Meanwhile, job generation is another benefit from the construction boom.
By 2012, 133,380 people will be employed in the construction sector across the state with the predominance of activity in South Florida, the state Employment Security Agency estimates.
And that doesn't take into account a large number of undocumented workers employed in the sector.
Making projections from figures for 2002, the agency predicts there will be 91,350 laborers statewide in seven years - a rise of 35%, compared with 15% nationally.
The number of construction managers in Florida is projected to rise 25% to 34,730 and the number of inspectors 12% to 7,300.