Real Estate Investor / Syndicator · Austin, TX · Member since 2013 · 210 posts · 135 votes
i was told by my mentors that the tax rate is very high for the capital gains for flippers and wholesalers compare to landlord. I understand the landlord part clearly, however does not know how much tax does a flipper or wholesalers pay ? Can someone shed some info on this ?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
Actually, @John Rooster its more complex than that. If you buy a property with the intention to hold it, you are correct. Short term capital gains tax applies if you end up selling in under a year, long term (currently capped at 15%) if more than a year. Self employment tax (SET, which is social security plus medicare, including the half an employer usually pays) doesn't apply.
OTOH, if your intent is to resell, even if you hold it more than a year, its still just ordinary income and subject to both tax at your ordinary income rate and SET. Wholesaling is always just ordinary income.
i was told by my mentors that the tax rate is very high for the capital gains for flippers and wholesalers compare to landlord. I understand the landlord part clearly, however does not know how much tax does a flipper or wholesalers pay ? Can someone shed some info on this ?
Flippers and wholesalers do not pay capital gains. They pay Tax at the ordinary rates as you do with your wages from employment. Then in addition to that they must pay themselves a reasonable salary with Social Security and Medicare. In some cases they could be paying 40% or more if they are only in the 25% bracket. Plus state tax.
We have many threads on this here at BiggerPockets. Check out the search function and you will find a wealth of reading material.
Denver, CO · Member since 2013 · 409 posts · 105 votes
12y
Profit on property held less than a year is taxed at the same rate as ordinary income. Profit on property held more than a year is taxed as long term capital gains. The tax advantage of renting a property is that by default you end up holding it for more than a year, and thus you pay long term capital gains tax. As with any tax scenario, application varies based upon your personal income situation.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
Actually, @John Rooster its more complex than that. If you buy a property with the intention to hold it, you are correct. Short term capital gains tax applies if you end up selling in under a year, long term (currently capped at 15%) if more than a year. Self employment tax (SET, which is social security plus medicare, including the half an employer usually pays) doesn't apply.
OTOH, if your intent is to resell, even if you hold it more than a year, its still just ordinary income and subject to both tax at your ordinary income rate and SET. Wholesaling is always just ordinary income.
Profit on property held less than a year is taxed at the same rate as ordinary income. Profit on property held more than a year is taxed as long term capital gains. The tax advantage of renting a property is that by default you end up holding it for more than a year, and thus you pay long term capital gains tax. As with any tax scenario, application varies based upon your personal income situation.
Real Estate Investor / Syndicator · Austin, TX · Member since 2013 · 210 posts · 135 votes
12y
For example, If a investor makes $10K in equity Capture . On average how much loss does he give up to taxes if he is a 1 year landlord and quick 3 month flip ?
Did not know that the 1 year landlord can be considered at normal rate due to intent of selling after 1 year. Was under the impression that if a property is hold more than 1 year its always long term capital gain capped at 15%. How does the IRS distinguish this. Does the CPA distinguish this before submitting the tax submission ?
Investor · Belton, TX · Member since 2013 · 47 posts · 9 votes
12y
Did you just see what happened? If you asked 5 tax preparers they would also give you 5 different answers. We as a group of Real Estate Professionals should get behind and support the FairTax.org. This Tax situation is ridiculous!
One of my tax buddies at my firm sent me over this article. He seems to think the IRS either classifies you as a dealer or an investor. An investor is someone that does not solely rely on the profits to earn a living (aka someone that has another full time job). This person would NOT be subject to SE tax and would be taxed at the capital gains tax if the property is held longer than a year. If they were classified as a dealer than your explanation would be accurate. Now I'm thoroughly confused. This is why I prefer financial statement audits and stay away from tax lol.
One of my tax buddies at my firm sent me over this article. He seems to think the IRS either classifies you as a dealer or an investor. An investor is someone that does not solely rely on the profits to earn a living (aka someone that has another full time job). This person would NOT be subject to SE tax and would be taxed at the capital gains tax if the property is held longer than a year. If they were classified as a dealer than your explanation would be accurate. Now I'm thoroughly confused. This is why I prefer financial statement audits and stay away from tax lol.
Being a dealer is a transaction by transaction basis. Someone who is solely a landlord is not a dealer. Whereas someone who flips is in the business of flipping homes. This is why many accountants suggest separate entities.
It has nothing to do if whether or not you have another job. You must be paid wages for work done. This is why corporations are important for flippers. A landlord is passive in nature that is why it is not subject to SE tax.
Now, that said if I actively do a lot of flips in my own name and then buy a rental fox it up rent it for a year and then sell what will the irs think? They will think I am trying to skirt the laws. If I do this repeatedly it could be overturned and I could be classified as a dealer as it appears those houses were really inventory and I did not plan to hold them long term as an investment because at that point I'm makng more money on the sale.
You shouldn't get different answers. Bow lets take average Joe who bought his neighbors house he was going to have his mother move in so they could take care of her. She doesn't move in because she passes. He fixes it up and sells itbecause he ddoesn't have a use for it he has a gain of 29k how is it taxed? It is taxed as a capital gain. He had no intent to sell it quickly it was a circumstance. Now lets say he bought it for purposes of reselling. It is inventory in a active business. This is how landlords who flip will be subject to SE tax on short term holds.
Real Estate Investor / Syndicator · Austin, TX · Member since 2013 · 210 posts · 135 votes
12y
@Steven Hamilton II
So for a pure landlord, its safe to assume that they're only subjected to long term capital gains of 15% ? Even thought they flip each of their rentals at the end of 1 year after closing.
From your answer i believe the scenario gets muddy when we mix landloring and flipping.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
@James Kandasamy you are correct the situation gets muddy if you mix the two. Consider a situation where a person buys a house, holds it for one, two or five years and then sells. If the person has a portfolio of rentals and sells one for some reason, this sale is very likely to be treated as the sale of an investment. So, they pay capital gains tax and no SET. OTOH, say the person has a dozen houses in thier pipeline. They buy houses, hold them for one or more years then sell. So, every year they have purchases and sales. These houses are inventory and the gains are subject to SET and ordinary income tax.
A "pure landlord" doesn't sell each house after a year.
Denver, CO · Member since 2013 · 409 posts · 105 votes
12y
This is all interesting to a point, then it just gives me a headache. What I can say for certain is that I have had two different professional Accountants prepare my taxes over the past 6, they both think that I qualify as "Real Estate Investor" as opposed to "Dealer". I was audited 5 years ago, and the IRS had no problem with the Real Estate Investor designation even though I make a lot more money from fix and flips then from rentals. I don't know the reasoning behind it. I can only speculate that it was because I have rentals that predated my fix and flip activities, or it may be that I put a substantial amount of work into the properties. ???
Flipper/Rehabber · Chicago, IL · Member since 2013 · 319 posts · 153 votes
12y
I think trying to do this on your own is very confusing. Always get the advice of someone you can trust that is knowledgeable in this particular area of focus. I really appreciate all of inputs though; really lets me know that I need to get a better understanding of this subject to more accurately guide the decisions of my company.
@Steven Hamilton II
So for a pure landlord, its safe to assume that they're only subjected to long term capital gains of 15% ? Even thought they flip each of their rentals at the end of 1 year after closing.
From your answer i believe the scenario gets muddy when we mix landloring and flipping.
I'm saying there is a possibility of that being overturned. That would very likely be turned over as flipping. And the rental income could be reclassified as self employment income. It would appear as though the pattern was rehabbing and that was where the profit was made. Not from expected appreciation or rental income.
You have to look at each property. That is an example of flipping. I'd recommend keeping some of them longer.
If you keep houses substantially longer than a year it would be fine and only subject to capital gains and recapture. If on the other hand you rehab a home list it for sale and then that is inventory. Delaying your sale of it is not changing that fact that you had to rehab the house. If you did not rehab the house and then sold it a year later its a capital transaction
This is why accountants recommend flipping in a corporation and holding rentals in an LLC.
Did you just see what happened? If you asked 5 tax preparers they would also give you 5 different answers.
There was only one tax professional who responded on this thread, and what he said is in agreement with every other tax professional I've spoken with who has real estate experience. In fact, there are plenty of BP threads on this topic, and the conclusion is always the same, even with different tax professionals contributing (i.e., they all agree).
If you talk to a tax professional who gives you a different answer than what Steven Hamilton (and Jon Holdman) gave you above, you should find a new tax professional...
I think trying to do this on your own is very confusing. Always get the advice of someone you can trust that is knowledgeable in this particular area of focus. I really appreciate all of inputs though; really lets me know that I need to get a better understanding of this subject to more accurately guide the decisions of my company.
Don't ever hesitate to ask. I'm in the north suburbs near Gurnee.
Real Estate Investor / Syndicator · Austin, TX · Member since 2013 · 210 posts · 135 votes
12y
Thank you so much for all who contributed . My knowledge on this area has increased. It would be clearer for me once i start talking to my CPA in the next few weeks. This is my 1st year filing taxes as a landlord.