Hi
I wanted to know what I should expect to pay on flips. For example I am a W2 wage earner at a day job and I have bought a property for 85K, I spent 20K on rehab and will now sell it for 130K.
Would it behoove me to put the property in my corporation name, (I paid cash for the house and rehab) and sell it from my corporation as well?
After the sell I have Realtor fees of 7800. as well.
Any help is greatly appreciated.
Dave
that depends on what your intention was.... If you had planned on renting the house out however someone twisted your arm to sell it to them than youre at the capital gains rate 15.3. If it was your intention to flip from the start than your at your normal income tax rate.
Keep in mind that you probably will have a ton of business expenses to write off as well.
Every time you took a trip to look at property in a vacation town is a write off... All of the education you paid for is a write off.
I would google a guy by the name of Glenn Wilson in Santa Barbara California. He is an expert in Investor Tax...
[ Edited by MichaelQuarles on Date 03/09/2008 ]
Thank you Michael,
So would all the costs of the rehab be write off's as well?
All the costs of the rehab are a part of the basis- essentially the cost of the property. Business expenses are also deductable, as are costs of purchase, holding, and sale.
Unfortunately flipping property is considered self employment, so you would have to pay Social Security and Medicare taxes of 15.3% on 92.35% of your profit, for an actual rate of 14.13%. Half of this is deductable, so if you are in the 35% bracket the effective "self employment tax" is 11.66 percent, bringing the total (Federal) tax on your "flip" profits to 46.66%.
Contrast this to a maximum capital gains rate of 15%, and see if it is worthwhile to rent the property for a year. Michael's suggestion that "intent" to hold long term is the letter of the law is well taken, but intent can be hard to prove and the IRS generally looks for an actual rental history with related deductions on your return along with the capital gains claim. 366 days from when you first advertise the property for rent before you attempt to sell it is generally required to claim profits from an investment property as long term capital gains.
An LLC would not change the tax implications, but other corporate structures have benefits- for example you can pay yourself a reasonable salary and take the rest of the profit as a dividend, and you will only have to pay SS and Medicare on the salary portion. I am not in the business of flipping so others would be able to give you better advice on tax strategies.
Chris
Thanks Chris.
[ Edited by davese on Date 03/17/2008 ]