Tax Questions

3 Replies

I've got some tax questions for all of you pros out there. When flipping homes, what is the best way to structure your company so that your tax liability is decreased? I've talked with several people and they have stated that capital gains tax can run anywhere between 20 and 40%.

Are people factoring this into their potential profit? I study these LTV ratios and look at repair costs, realtor costs, closing costs, and carrying costs. I rarely see anything on the tax end. Can someone please explain so that I can be prepared and somehow factor this in to get the most profit at the end of the year? The government never seems to give money away so I don't want to either.

Thanks to all...this web forum is the best!

If you hold it for one year it'll be Long Term Capital Gains, which is (I think) 15%.

Hold it for less than one year and it'll be Short Term Capital Gains, which is your Marginal Tax Rate-ie; 15% and 35%. Marginal means that is the % you will pay on each ADDITIONAL dollar of income.

I don't know any way setting up another entity is going to cut your taxes.

I wouldn't worry too much about taxes. The US has (AFAIK) the LOWEST tax rate in the (Western/modern) world. I had taxable income of over $120K last year and my AVERAGE tax rate was 11.7%, my marginal rate was 15%.

If you do enough flips though you could end up bein classified as a "dealer" which I think then puts you into the category of having to pay Social Security/Medicare (15.3%) on top of your taxes.

Don't do too many! Or don't do just flips.

all cash

You may want to consult with a tax pro that is knowledgeable in RE Investing. To qualify as a long-term capital gain you must hold the property for 1 year. If it is held less than 1 year you will be taxed as ordinary income. Depending on your tax bracket, that can be quite a hit. Tax planning is an important part of this business. Many people try to save a few dollars by doing it themselves with the tax software that is out there but you can wind up paying a lot in taxes.