Specialist · AZ NM IL TX CA · Member since 2016 · 15 posts · 1 vote
If I am currently full time employed in Illinois and fit into the 28% Tax Bracket, what taxes do I pay for my flipped property? Am I still paying 15% of capital gains or do I pay 28% on capital gains due to my current earnings? What if my capital gains including my employed earnings are over 200K do I pay 33% as tax brackets indicate. Lets say that the property is my second property and I will sell it after 6 months.
If you bought one property, rehabbed it, and then sold it, you are not a "flipper." You are just a taxpayer who bought a capital asset and then sold it. You are subject to capital gains tax. If you held it for one year or less, you will be taxed on the Short Term Capital Gains, which will be at your ordinary income level. If you held the property for a year and a day, you will be taxed on the Long Term Capital Gains, at the rate applicable for your tax bracket. You indicated that it is 15%. And yes, your tax bracket is determined by the total amount of your taxable income, although part of it will be taxed an one rate, and part of it at another.
There is a lot of talk on the Forum about "intent" and in some cases that is important, but not here. Your intent when you buy a property is irrelevant (unless it is a Replacement Property in a Section 1031 Exchange, or you are trying to qualify to be treated as a Real Estate Professional by the IRS). The facts of the transaction are what you report, and the amount of the profit and the time that you held the capital asset are all that matter.
It is not merely the length of time you hold the property, but the intent which determines if a property is a capital investment (such as a rental) or an item in inventory (in the case of a flip).
If you are in the business of rehabbing (flipping) houses, then the houses are inventory regardless of whether you sell them in 4-months or 14-months.
Sure, if this is a one off "flip", you might be able to stage things to look like you planned to rehab it as a rental and then changed your mind. However, you won't be able to do that serially without catching the taxman's attention.
If you bought one property, rehabbed it, and then sold it, you are not a "flipper." You are just a taxpayer who bought a capital asset and then sold it. You are subject to capital gains tax. If you held it for one year or less, you will be taxed on the Short Term Capital Gains, which will be at your ordinary income level. If you held the property for a year and a day, you will be taxed on the Long Term Capital Gains, at the rate applicable for your tax bracket. You indicated that it is 15%. And yes, your tax bracket is determined by the total amount of your taxable income, although part of it will be taxed an one rate, and part of it at another.
There is a lot of talk on the Forum about "intent" and in some cases that is important, but not here. Your intent when you buy a property is irrelevant (unless it is a Replacement Property in a Section 1031 Exchange, or you are trying to qualify to be treated as a Real Estate Professional by the IRS). The facts of the transaction are what you report, and the amount of the profit and the time that you held the capital asset are all that matter.
As others mentioned the profits from a flip owned for under 1 year will be taxed at your personal tax rate. But, it is very important to note that you will likely also have to pay self employment tax on that income as well around 15.3%... This is on top of whatever you pay for your standard tax bracket. If you only flip a house or two per year you may be able to get out of this, but once the IRS considers you a dealer (flipping multiple houses) you will pay SE tax.
So if you are in the 15% tax bracket and you made 100k on a flip you would pay: (if you made 100k you wouldn't be in this bracket, this is just an example for easy numbers)
$15,000 income tax
$15,300 self employment tax
And state income tax (whatever your state rate is)
Matt
There is no 15.3% SE tax on Short Term Capital Gains. Again, we are mixing two categories. Short Term Capital Gains is not the same as business income taxed at your personal tax rate. The Short Term Capital Gains tax rate is the same as your personal tax rate, but it is not SE income, and there is no 15.3% SE tax, it is still Short Term Capital Gains.
And there is no getting out of it, this is what it is. The IRS is not the one to decide if you are a Real Estate Professional and are operating a business with an inventory of houses. The Taxpayer is the one who makes this decision. We have a self-reporting tax system. Buying and selling one or two houses a year, maybe even three, does not make you a dealer (unless you want to claim that you are in order to claim losses). You will either pay STCG or LTCG.
But if you want to pay the highest tax possible, go ahead. It is just not necessary.
The IRS is not the one to decide if you are a Real Estate Professional and are operating a business with an inventory of houses. The Taxpayer is the one who makes this decision.
I'm not sure what Real Estate Professional has to do with this discussion, but it is most certainly NOT a decision left to the taxpayer (other than for-some-reason choosing not to elect RE Professional status when otherwise qualified). The IRS has a very specific definition of RE Professional (minimum 750 hours worked on qualified tasks and no other job with more hours is the gist). Do a Google search...the specifics are easy to find. A taxpayer isn't an RE Professional just because he decides he is.
Regardless, whether someone is classified by the IRS as a Real Estate Professional will likely play no role in the determination of whether their flips should be taxed as ordinary income or capital gains.
Just a quick comment on the Self Employment tax- you indicated your flip profit and income would take you over 200k- but you didn’t state filing status. You may be over the SE threshold and not have to worry about it additional OASDI just Medicare.
My spouse and I are employed W-2 workers - she exceeds the cap and I am $6000 from doing so. We do 2 properties a year 1 flip a year and 1 to hold for rental (essentially the flip replenishes our equity / capital to hold the rental when refinancing out). Once I take the flip profit into account we both will have phased out the 12.4% social security portion of the SE tax. Don't be afraid of a SE tax if w-2 employed- be thankful you made that much and boosted your yearly social security earnings- but it will likely not bite you to the tune of $15k in extra tax on a $100k profit. Especially if you are up the tax (bracket) ladder (amounts depend on filing status). For single it phases out in the 24% bracket and married filing jointly in the 22% bracket.
Medicare never phases out and increases 0.9% after a certain level.
Netting it out if you make $125k W-2, and $100k PROFIT after all expenses on a flip- You’ll pay 15.3% on the first $35.2k of the flip, the 2.9% on the next $39.8k then 3.8% on the last $25k
Total SE tax = $5385 + $1154 + $950 = $7489
Plus income taxes in your bracket (ladder) are 22 or 24% say $22,000
in total from your $100k profit your taxes are $29489 and you retain $70511
You’ll see the benefit if you pull your annual social security statement when it caps out and the boost years of hitting the cap can have on your social security.
You also can chop down the bracket you’re in by maximizing your 401k contributions on w-2 income -talk to a tax planner to ensure you maximize those opportunities.
The self-employment tax rate for 2023
As noted, the self-employment tax rate is 15.3% of net earnings in 2023. That rate is the sum of a 12.4% Social Security tax (also known as OASDI tax) and a 2.9% Medicare tax on net earnings. Self-employment tax is not the same as income tax.
For the 2023 tax year, the first $160,200 of earnings is subject to the Social Security portion. This is up from $147,000 in 2022.
A 0.9% additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly.
The self-employment tax rate for 2024
For 2024, the first $168,600 of earnings is subject to the Social Security portion (up from $160,200 in 2023). The self-employment tax rate for 2024 remains 15.3% of net earnings.