There are several ways for those with good credit or financial resources to capitalize on those assets and generate profit or personal revenue. Buying real estate is one way to use good credit or personal wealth to generate ongoing income or a sizable amount of money in a single transaction.
For example, house flipping is an investment decision popularized by reality TV shows and many financial coaches. The basic idea is to buy a property that is in mediocre condition for the lowest amount possible, improve its appearance and then sell it for a significant profit. Investors may turn the ugliest home in a neighborhood into truly attractive and valuable property.
In recent years, with housing prices increasing and more people worried about affording a mortgage or rent, lawmakers have looked at wave to regulate housing, which has included bills that would significantly reduce the opportunities for home flippers. Is it still possible and legal for those in the San Diego area or elsewhere in California to buy a home and then resell it for profit?
Lawmakers have not yet changed state statutes
In 2021, California state lawmakers proposed a bill that would drastically alter the residential real estate market across the state. It specifically targeted home flipping practices. The bill proposed the imposition of a sizable tax on anyone reselling real property for a profit quickly after its acquisition.
AB 1771 proposed a 25% capital gains tax imposed on the proceeds of a home sale conducted within three years of its initial purchase. The law would then step down those taxes by 5% each year through the seventh year of ownership. Sales after that point would not incur the extra taxes. Thankfully, for those hoping to invest in real property in California, the bill failed to pass. While there are still costs and taxes that may apply when flipping a property, there is no special tax imposed on investors hoping to repair and resell a property quickly for profit.
Even if there are no tax consequences to flipping, there are other legal risks involved in home flipping and other for-profit real estate enterprises in California. Learning about the risks and challenges of home flipping may help those thinking about real property investment make the best choices given the current law and their available resources.