I'm just starting out here and am looking for my first property to buy-fix-flip. I do have a day job however so this is really on the side. My question regards taxes. From what I can gather, If I flip a house within 1 year under my own name (not under an entity), I will have to pay short term capital gains taxes. I'm confused as to whether or not I'll have to pay employment taxes too. And if my intent is to flip, am I autmatically considered a "dealer?" I have also read about the benefits of forming an S Corporation. Let's say hypothetically I net $10,000 in the year from the flip -- under and S Corp what would my "income" be vs capital gain?
Any help is appreciated!
I can answer the "Dealer" question:
I believe that for tax purposes, a dealer is someone who flips 5 or more homes in a year. You should talk with a CPA who understands the legal terms.
I wouldn't set up an S Corp. Maybe an LLC, but that depends on why you want to do it. Either one pays no taxes at the entity level and the income passes through to the owners to be taxed as ordinary income.
Employment taxes only apply if you pay W2 wages to someone (employee or yourself), and short term capital gains are the same as ordinary income.
Probably best to go meet with a CPA and they will help steer you in the right direction.
A few things to mention....
@Albert W. - "Employment taxes only apply if you pay W2 wages to someone (employee or yourself), and short term capital gains are the same as ordinary income." - To clarify, I think you meant to say that short term capital gain rates are taxed at your ordinary income tax rates. Short term capital gains are not subject to self employment tax, while ordinary income can be subject to self employment tax based upon the source.
Talk to a CPA, happily pay for the consultation. It will save you headaches now and save you headaches and a lot of money on taxes in the future!
Best of luck!
Jake Hottenrott CPA, Jacob R. Hottenrott, CPA, LLC | 618‑304‑1584 | http://jakehottenrott.com
I've never heard of a real estate investor using an S-Corp, if you want to set up a business entity (which is a good idea, although I do not believe it will help you with capital gains - make sure to check with your CPA though), I would go with an LLC.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
You must be a BiggerPockets member to post on the forums
Join the world's largest, most open Real Estate Investing Community online, 100% free forever!