Considerations for starting to flip cars?

I have been putting some thought into buying cars that need a touch of work and flipping them for a bit of extra income. What things do i need to take into consideration in order to do this right?

I do have a few questions i have thought about.

Is there any legal way to lessen the hit from taxes? Each car i buy would be hit with sales tax and then again when i sell it as income tax right?

Is there a way for me to let people test drive it without registration?  I wouldn't want to pay for a full year of registration just to sell the car within a few weeks. Could a dealer license help with that?

Any catches that i am probably overlooking that might make this idea not feasible? 

Depending on your income situation if these are cash only transactions who would know you were doing it for income?

Space if you pln to do more then 1 or 2 at a time.

State dealer license depending on how many. In many states you might not want to cross that threshold.

Cash on hand to buy.

Keep test drives to the neighborhood, but registrations might be cheap depending on age of the cars.

I’ve been using a buy high, sell low strategy…recommend you try something else.

First, find out how many cars you can sell privately in your state before you need a dealer license, then see how well that would play with your plans.

I would suspect (haven't checked) that dealers probably don't pay sales tax when they buy a car for resale. But there might be other requirements like having a place of business, having a certain verifiable amount of capital etc etc.

Income tax is obviously only due on the profit you make, not the whole amount. But I would expect that for a legit test drive, you'll need to have registration and insurance on the vehicle.

A bunch of "clever" people try to avoid the sales tax bit by having a half-open title on the car, but IIRC that's illegal in roughly 51 out of 50 states. The other one is buying cars privately in NV, because you don't have to pay sales to register vehicles that you get in private sales, even from out of state. Downside, only three cars annually before you need a dealer license.

Each state has their own rules/laws in regards to a dealers license. In Florida if you're going to sell over 5 cars a year you need a dealers license, so I would start with checking your state laws regarding that. 

If you don't have a dealers license I'm not sure you'll need to pay income tax on the sale of a personal car; however, I'm no expert on that topic so maybe a GRM CPA can chime in. 

Test drives: the best way to do that is to get a dealers license, business insurance, and a dealer tag. 

From my experience flipping cars:

- Stay away from niche and performance models. They seem to have the biggest disparity in profit margins. You're either going to make a killing or barely break even. 

- Start cheap and work your way up once you gain the capital and experience and can expand into different types of used car markets. 

- Only fix what is needed to make a quick turnaround and/or make the car safe/road legal. No need to replace brake pads and rotors with Hawks and Cryo treated rotors unless you're aiming at that crowd. 

- Do your research

RX Reven' said:

I’ve been using a buy high, sell low strategy…recommend you try something else.

You and me both, brother.

I've since refined it to buy high, throw a bunch of expensive parts at it and _then_ sell it low.

BoxheadTim said:

First, find out how many cars you can sell privately in your state before you need a dealer license, then see how well that would play with your plans.

I would suspect (haven't checked) that dealers probably don't pay sales tax when they buy a car for resale. But there might be other requirements like having a place of business, having a certain verifiable amount of capital etc etc.

Income tax is obviously only due on the profit you make, not the whole amount. But I would expect that for a legit test drive, you'll need to have registration and insurance on the vehicle.

A bunch of "clever" people try to avoid the sales tax bit by having a half-open title on the car, but IIRC that's illegal in roughly 51 out of 50 states. The other one is buying cars privately in NV, because you don't have to pay sales to register vehicles that you get in private sales, even from out of state. Downside, only three cars annually before you need a dealer license.

Hmm explains why there are so many Nevada and Montana plates in my office parking lot. 

DirtyBird222 said:

If you don't have a dealers license I'm not sure you'll need to pay income tax on the sale of a personal car; however, I'm no expert on that topic so maybe a GRM CPA can chime in. 

Talked to my CPA about that a while ago. If you make a profit on a vehicle, you're supposed to pay taxes on the profit. Doesn't matter if you're a dealer or not. Keep in mind that that's profit after you take into account all expenses.

Not that that's a problem I've had to deal with.

DirtyBird222 said:

BoxheadTim said:

First, find out how many cars you can sell privately in your state before you need a dealer license, then see how well that would play with your plans.

I would suspect (haven't checked) that dealers probably don't pay sales tax when they buy a car for resale. But there might be other requirements like having a place of business, having a certain verifiable amount of capital etc etc.

Income tax is obviously only due on the profit you make, not the whole amount. But I would expect that for a legit test drive, you'll need to have registration and insurance on the vehicle.

A bunch of "clever" people try to avoid the sales tax bit by having a half-open title on the car, but IIRC that's illegal in roughly 51 out of 50 states. The other one is buying cars privately in NV, because you don't have to pay sales to register vehicles that you get in private sales, even from out of state. Downside, only three cars annually before you need a dealer license.

Hmm explains why there are so many Nevada and Montana plates in my office parking lot. 

Montana I get due to the low registration fees and the Montana LLC registration thing. NV is *not* a cheap state to register a car in though. In fact it's usually more expensive to register a car in NV than it is in CA!

I flip cars all the time.  I pay a local dealer $200 to do the paperwork through his lot.  I pay income tax at the end of the year on the profit I make after expenses.  There is no sales tax involved when purchased or sold wholesale cars, the end purchaser pays the sales tax.

It is difficult to find someone who will be willing to let you do that.  They have a lot at risk, as do you.

I am not sure where you live.  I am in Florida and golf carts are easy to flip and there is no sales tax, registration or titles to contend with.  I make almost as much on a cart as a car, and they are easily purchased in bulk.

Have you considered parting out cars? Often times weird older cars are worth more parted out than they are whole.  That's solves the titling and sales tax issues.  I once parted out an engine-less c5 shell I bought off craigslist for 2k for almost 5 grand!

Ill try to tackle your questions in order...

I have been putting some thought into buying cars that need a touch of work and flipping them for a bit of extra income. What things do i need to take into consideration in order to do this right?

Don't think that extra income is going to be huge dollars but, they can be extra dollars.  Other savings can come if they provide cheap transportation for yourself in the short run.  I have been flipping salvage cars for the past couple of years.  I have a genuine transportation business so some of the cars stay in my business fleet, other I keep for myself in either the short run or long run.  Then, there are some they I buy just for the flip.  However, I don't buy anything I would be willing to just keep if I had to.  

I do have a few questions i have thought about.

Is there any legal way to lessen the hit from taxes? Each car i buy would be hit with sales tax and then again when i sell it as income tax right?

I do rightfully pay the state sales tax when I buy them (Ohio).  Considering that I buy mine from a genuine business who follows the rules, there is no way for me around the paying of the sales tax on the purchase price.  For me, this is 6.75% so I have to factor that into my calculations when I decide how much I would be willing to pay for a car. 

As for income tax, Ohio seems to allow a certain amount of "private sales" before they want to regulate.  By staying under that it seems that no one comes after you for taxes.  Also, remember that it is sales on the profit.  That profit would seem to come for the sale price you put on the title at sale.  That sale price on the title is also what the buyer then pays for sales tax to buy the car.  It would then seem that there is an incentive for the price written when I sell should be just about the same price as when I bought the car. 

Is there a way for me to let people test drive it without registration?  I wouldn't want to pay for a full year of registration just to sell the car within a few weeks. Could a dealer license help with that?

Plates in Ohio are cheap at $50 per year.  When I buy a car I have 30 days to transfer the valid plate from car#1 to car #2.  That gets me 29 day.  After that it is $17 to officially transfer the plate to car #2.  Over the course of 12 months I have transferred one plate to a couple of cars and If I have had a car less than 30 days then the formal-ness (read: dollars) of the transfer never needed to happen.  Of course, this all varied by state.  

Yes, I insure them.  I have a real insurance agent and I just email over her the VIN when I buy.  Liability only on crappy cars with a multi car discount is very cheap here in my rural community.  Of course, this varies by state also.  An '07 Ford Focus might cost me $115 for 6 months or a net of less than $20 for each month I have it.  

Any catches that i am probably overlooking that might make this idea not feasible?

ITS ALL A CATCH.  Further more, it is just a legal form of gambling so ask yourself when buying, "how much can I stand to loose?"  There might be profits...might.  I've done okay but my bigger wins have been cars where I added 25,000 miles on them in a year and then sold them for more or even to what I paid for them with all repairs a year later.  Detailed examples: Ford Focus and Toyota Avalon.  Those links should take you to more purchases also.  

Further advice: it is all about buying the car low enough.  If you can not buy it low enough then you will only be able to recoup from selling for high enough.  You might have to wait to buy low enough but that waiting doesn't really cost you money.  When you are waiting to sell for high enough, every day costs you money carrying that car.  

Another wisdom learned is that simple, normal, plain cars sold to simple, normal, plain people sell a lot easier and can bring easier money than unique, odd, special cars sold to unique, odd special people.  

In summary... give one a try.  You'll learn a lot on that first one!  

Also adding...  Everything I "think I know", I learned from pimpM3

I have found sticking to cars you are familiar with is a good place to start.

For example if you are familiar with say a wrangler.  You will know what to look for with them, what commonly goes wrong and what they sell for.  Also familiarity makes selling them easier.  If you know a lot about an item it is easier to describe it to the buyer.

I suggest doing some strength training beforehand, so you don't tear a bicep.

Strongly encourage you to buy older fully depreciated Italians. Biturbos have hit their trough and are rapidly appreciating. Buy one extremely used, throw some Chrysler parts on it to get it running good and sell for major profits.

I have a close friend that is doing fairly well flipping cars as a side job.  From afar it looks easy, but I've watched his operation over the years.  He has built a tremendous amount of knowledge of the markets he plays in.  Shops very carefully.  Knows how to walk once the purchase price gets to high.  Specializes in the types of vehicles he is comfortable with.  He has built up a good amount of capital to play the game without borrowing.  Since he has a small shop, he makes sure he only has only one to two vehicles going at any time.  He doesn't get over-stocked.   He is good at presentation in the marketplace.  His success rate is fairly high.  That said, he doesn't make a profit on every flip.  Some are break-even.  But, his success rate is fairly high, mainly because he does so much homework on the front end.

What I learned flipping cars is buyers don't want high mileage cars almost no matter how cheap.