This business is no different then any other small business. Your losses are your losses are your losses but they only apply to each year they occur in. These sales cannot be treated like capital gains. They dont qualify as 1031 exchanges. Yes the logic of moving our current escrows to close after Jan 1 is due to the income we have already made this year.

As for the reasons I am doing it, it is because I see it as an opportunity. Is it risky? Yes but I don’t view it to be nearly as risky as someone on the outside. The other two investors are electrical engineers as I am as well. My income from real estate transactions this year, (not from my flipping) is very good as well. As I said at the very beginning, what was hard for ME to stomach was to have a couple hundred thousand sitting in a 2% cd. So after taxes I was making what… a little over 1%? I knew with hard work and diligence I could at least minimize the risk, and participate in a market that while manipulated at least I understood the manipulation. I could have dumped the money into the stock market and done great but I don’t have control over that market.

So the risk premium while not pallatable, (or advised) for most people was for me. I will repeat, I do not advise anyone else to try this.

The taxes are a killer. That 40k isn’t 40k it’s 70% of 40k or whatever your bracket determines.

At least if you were playing black jack then all your gains and losses would be in a short timeframe such that you just have the net gain to pay taxes on…

Can you even apply your future losses to your current gains? Is that the logic of moving the closes to after Jan 1st? Such that when the music stops it will be in the same year as as many of the gains as possible?

Yikes. The only motivation I can see for putting in this much effort for such a risky venture is (a) because the big boys are making money at it, and you want in. (b) the transaction numbers are so few in SD that you aren’t making enough as a regular Realtor right now…

Can we play it more aggressively? Yes we can however I am not a fan of messing with the IRS and have more to lose then gain. So that will cost me a few more thousand in taxes. Not good. I am not a tax expert, we use an accountant who is very risk averse.

You are rolling the equity from closings into other properties, and deferring the capital-gains tax.

But once the music stops, you’ll end up owing fed and state tax on the net profit on every deal. Does having an LLC help greatly, or just a minor benefit in reducing income taxes?

The overlapping is random and is simply based on liquidity we have. Right now we are full or RE and have a little cash if we wanted to buy a cheap condo… which we are trying to. Although 2 of the homes are in escrow, one is past the contingency period and one has not. One home got listed today and one will be in another 2 weeks. Right now we are actually trying to push escrow closings to after Jan 1.

The question you asked is one I would pay for an answer to. I could not tell you how fast the market can roll over but I think within 2-3 months in the case of something rather cataclysmic. As you would agree what we are doing is terribly risking and not recommended at all. We have been lucky and I only wish we started at the end of 08 instead of the middle of 09.

How overlapping are your properties? How much cash are you leaving out there at any given time? That’s got to be the key decision. That and how long this arbitrage opportunity lasts is going to determine whether you end up making or losing money overall. Though I assume you have a baseline scenario in your head for just how fast you think the market could fall in a worst case scenario, and that’s probably not as bad as getting a house that has $50k+ of issues that take time to repair.

The 600k to earn 45k is not what was planned. Also we have 3 closings under our belt so we are playing with SOME house money. Jim featured just 1 of our homes and recall we have 7 of them. In fact that 45k is a perfect illustration of our strategy. Actually when we close it will be about 55k. So we had a higher profit margin targetted but after a very short time on the market with no acceptable offers we slashed the price by 30k to be consistent. Our goal is to NOT get caught with property and to stay liquid. So if we don’t get what we want quick we cut and run.

So yes on the outside looking in a 600k investment to make 45 or 55k is an idiots game, but if you look at the whole story it makes more sense then holding a depreciating asset hoping for someone to come in and then getting killed right?

As I said, we are not expert at this but I do feel like we are adhering to a strategy that will help us avoid getting hammered. It is absolutely inevitable that we will be holding properties when the bottom does fall out but we are trying to minimize the probability and reduce the fallout when it does happen.

It really does seem like a gamble, of when do you say when? After the first time margins go under 5%? After the first time you get unlucky on deferred maintanence needs?

More power to you. $600k seems like an awful lot of money to put on the line just to clear $60k.