Tips on Cash deal TAXES?

6 Replies

So I will be making a good amount of cash from the sell of my home. Since I have been at my home for Way over the 2 yr minimum I will not have to pay Capital gains. With this cash I  plan on kicking off my investing career. I have been reading and researching and listening to the podcasts religiously and feel ready to get my feet wet. 

As I have gone over various scenarios....I have one question that has been bugging and would like some "Veteran" input. What is the best way to avoid paying HUGE taxes on real estate on an ALL CASH deal? Would forming some sort of LLC or the like help me? It would suck to lose half my profits from a cash deal to capital gains...In theory cash seems like the way to go...but after thinking about the taxes ...Im not so sure. I have been thinking of using hard money loans to maybe help this dilema. Im sorry if you are reading this and shaking your head at what a foolish question this might be....BUT Im a newbie at this game...and yes..I plan on speaking with a CPA next week, but any info or advice before hand would be greatly appreciated :)

What type of investing are you considering that would result in "huge taxes" for using all cash? There 's no penalty, so to speak, when paying all cash vs using hard money. 

Originally posted by @Kyle J. :

What type of investing are you considering that would result in "huge taxes" for using all cash? There 's no penalty, so to speak, when paying all cash vs using hard money. 

 Fix and Flip type........

I too am at a loss as to how a cash deal throws off higher capital gains.  

First, if you're looking at fix/flip - those will be ordinary income.  If you've got a loan on the purchase, the mortgage interest may be included in the basis and thus lower your gain, but this amount would (should!) be fairly negligible as a total portion of your overall costs.

If you're looking at buy/hold - the rental on it will be passive income, taxable as ordinary income up to certain limits.  The mortgage interest would then be a deduction against that income.  If you sell it later, that's when capital gains come into play and there's no difference in your basis if you've mortgaged it or paid cash for it, with the possible exception of some loan fees which would (should!) be negligible.

Also, just to pick nits - capital gains taxes never have been 50%.

Originally posted by @Esaul Viramontes :
Originally posted by @Kyle J.:

What type of investing are you considering that would result in "huge taxes" for using all cash? There 's no penalty, so to speak, when paying all cash vs using hard money. 

 Fix and Flip type........

Even with fix and flips there's no extra tax for paying with all cash. It's going to be taxed as ordinary income and you'll pay taxes based on your net profit.

As mentioned, fix and flip is taxed at ordinary income tax rates, plus Ss/Med taxes. If you think you'll make $100k or so a year, you can have the LLC taxed as a subS, pay withholding taxes on the first $50 k or so ("a reasonable salary") and pay just income taxes on the "profit". Otherwise an LLC has no tax difference.

Originally posted by @Wayne Brooks :

As mentioned, fix and flip is taxed at ordinary income tax rates, plus Ss/Med taxes. If you think you'll make $100k or so a year, you can have the LLC taxed as a subS, pay withholding taxes on the first $50 k or so ("a reasonable salary") and pay just income taxes on the "profit". Otherwise an LLC has no tax difference.

Sweet....that's a huge relief. I am planning on opening an LLC and paying quarterly taxes.....cash it is :)

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