Property Gain Taxes in Maryland

Damascus, MD · Member since 2016 · 74 posts · 7 votes

Hi Everyone,

I am trying to understand how the property gain taxes work in Maryland. I know I can use a 1031 to work around the taxes for a little bit but I will using a private lender so I don't believe that will be an option for me in the beginning. I guess what I want to know first is how much are the gain taxes going to be in Maryland? Also are these taxes something I should put into my number in the beginning. My ultimate goal is to profit 25k per flip so should I push my goal up to 30k so I will get 25k after taxes or should I just keep my goal where it is.

Thanks

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Mark Creason

Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes

10y

Russell is right. If you are buying and flipping, you would be considered a dealer and have to pay taxes as ordinary income. Is your purpose to buy and flip, then you are a dealer.

Mark

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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
10y
I'm pretty sure taxes on a flip are assessed as self employment income. So you would not be able to do a 1031 exchange to shelter the money from taxes. So the income will be taxed as ordinary self employment income at the applicable tax rates. @Brandon Hall is a CPA and would know for sure, as would probably @J Scott who is an avid flipper.
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Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
10y
Russell is right. If you are buying and flipping, you would be considered a dealer and have to pay taxes as ordinary income. Is your purpose to buy and flip, then you are a dealer.
Mark
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Aj Bowman
OP
Damascus, MD · Member since 2016 · 74 posts · 7 votes
10y
I thought once I sold a house after a flip I could use a 1031 to put my profits towards my next house so I wouldnt be taxed until I sell my next flip.
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Brandon Hall
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
10y
@Russell Brazil and @Mark Creason are right on the money.
@Aj Bowman since you are going to be flipping, and assuming that's your main strategy, 1031s will not be available to you as the flips will be considered inventory and the profits subject to ordinary income rates and SE taxes.
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Aj Bowman
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Damascus, MD · Member since 2016 · 74 posts · 7 votes
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Originally posted by @Brandon Hall:

@Russell Brazil and @Mark Creason are right on the money.
@Aj Bowman since you are going to be flipping, and assuming that's your main strategy, 1031s will not be available to you as the flips will be considered inventory and the profits subject to ordinary income rates and SE taxes.
Ok Thank you for the clarification. Do you know what those rates are?
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
A few things:
- You can't do a 1031 on flips, only investments (rentals)
- You'll pay ordinary income taxes at your marginal income tax rate, no different than if the income were coming from a regular job
- You'll likely also be on the hook for self-employment taxes, though these may be somewhat mitigated with property entity structuring
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Brandon Hall
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
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@Aj Bowman well, federally it's just your ordinary tax rates. So however much income you earn, subtract certain deductions to get to your AGI, then look at what your marginal tax bracket it. If not utilizing an S-Corp, 92.35% of your flipping income will be subject to 15.3% SE taxes.
At the state level, you can find MD tax info here. Also keep in mind that if you are not a MD resident, or are partnering with folks who are not MD residents, you will have funds withheld at closing when you sell real property.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Aj Bowman:

Originally posted by @Brandon Hall:
@Russell Brazil and @Mark Creason are right on the money.
@Aj Bowman since you are going to be flipping, and assuming that's your main strategy, 1031s will not be available to you as the flips will be considered inventory and the profits subject to ordinary income rates and SE taxes.
Ok Thank you for the clarification. Do you know what those rates are?
Whatever your marginal tax rate is, which will be based on your total income level.
Here are the tax brackets for 2016:
http://www.forbes.com/sites/kellyphillipserb/2015/...
So, if you made, for example, $100K in 2016, about 28% of that would go towards Federal taxes. In addition, Maryland charges 6%. And there would be self-employment (FICA) taxes on top of that.
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Aj Bowman
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Damascus, MD · Member since 2016 · 74 posts · 7 votes
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Thanks Everyone
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
10y
Originally posted by @Aj Bowman:

I thought once I sold a house after a flip I could use a 1031 to put my profits towards my next house so I wouldnt be taxed until I sell my next flip.
Hi AJ,
Unfortunately, no. Properties that are bought with the intent to rehab/sell (flip) are held for sale (i.e., like inventory) and are not held for rental/investment purposes as required for a 1031 Exchange. You would qualify if you had the intent to buy, rehab and then hold for rental or investment purposes, but with the intent to buy, rehab and then sell as quickly as possible you would not qualify.
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Account Closed
Professional Auctioneer · Baltimore, MD · Member since 2015 · 1k+ posts · 1k+ votes
10y
On Flips you will make a tremendous amount of money if you do them right:
- Make full profit disclosures
- Use a Skinny contract of sale
- Have a long study period
- Get right of possession
- Create some contract "candy". (Anything a seller can add; owner financing subject to full assumption by your assignee with release of liability, the car in the garage, cash back at settlement, delayed settlement, all the furniture...etc.) Anything that will make the property attractive to your end user (assignee). Negotiate "Contract Candy" at the time you are making the offer.
- Offer the property for all cash in "as is" condition, consider the auction method of marketing. (Control and Roll)
So if you make lots of money, pay your Uncle (Sam), enjoy your wealth and repeat the process as often as you can.
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Tamara V.
Investor · Bethesda, MD · Member since 2015 · 94 posts · 17 votes
10y
@Account Closed I enjoy your posts and find them educational. I wonder how things change if you are a licensed realtor - for example using a skinny contract of sale. If you are licensed are you required to use the forms realtors use (I have found these to be not skinny) in Maryland and DC?
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Account Closed
Professional Auctioneer · Baltimore, MD · Member since 2015 · 1k+ posts · 1k+ votes
10y
Originally posted by @Tamara V.:

@Account Closed I enjoy your posts and find them educational. I wonder how things change if you are a licensed realtor - for example using a skinny contract of sale. If you are licensed are you required to use the forms realtors use (I have found these to be not skinny) in Maryland and DC?
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Account Closed
Professional Auctioneer · Baltimore, MD · Member since 2015 · 1k+ posts · 1k+ votes
10y
Thanks for your comments:
As an investor and a Realtor, I understand how brokers want to brain wash their agents about their position with their brokerage; the Brokers knows that if their agent learns how to make money as an investor, they will soon forget about working for tips! That's OK, that is their thing.
As an investor with a real estate license, you have the right to make offers, buy properties, negotiate transactions as a private person as long as you do not involved your brokerages or try to charge a commission. If your broker does not understand this, find someone else to work for. Why should you be shunted from making money using your investment knowledge?
it is wise to disclose to your brokerage what you intend to do in real estate, there is more to being an agent than listing and selling, controlling real estate for a profit is the highest form of profit potential you can create.
As an investors, you could create skills to out perform the broker's income.
Always be respectful, talk to your broker, let the broker know that you have higher aspirations, your goals are that of an investors and wealth creator..
If your broker wants a cooperation commission on everything you purchase, move on.....find somewhere else to hang your license with.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:
As an investor with a real estate license, you have the right to make offers, buy properties, negotiate transactions as a private person as long as you do not involved your brokerages or try to charge a commission. If your broker does not understand this, find someone else to work for. Why should you be shunted from making money using your investment knowledge?
it is wise to disclose to your brokerage what you intend to do in real estate, there is more to being an agent than listing and selling, controlling real estate for a profit is the highest form of profit potential you can create.
As an investors, you could create skills to out perform the broker's income.
Always be respectful, talk to your broker, let the broker know that you have higher aspirations, your goals are that of an investors and wealth creator..
If your broker wants a cooperation commission on everything you purchase, move on.....find somewhere else to hang your license with.
Keep in mind that different states will have different rules for what licensed salespeople can and can't do, and every brokerage will have their own set of rules. My wife and I are licensed in three states, and the rules (and requirements by our brokerages) are very different in each. For example, in Georgia, it would be very difficult to find a broker who'd be willing to allow us to use a non-state contract and not run the deal through the brokerage (state laws are pretty tough on brokers and as such, brokers are tough on agents).
For the most part, we work with flat fee brokerages, so we're only paying a small fixed fee every time we do a transaction (not a percentage of the commission). That said, we pay this fee regardless of whether we're buying/sell for ourselves or for someone else. None of our brokers would be willing to allow us to do deals without working through the brokerage (there is broker liability on anything we do, even if we're the principals), and the brokers don't waive their fees just because we're transacting for ourselves.
We might be able to find brokers who will waive fees on our own transactions, but they are likely to charge higher monthly fees or a larger commission split on transactions where we're not the principals. It's all a trade-off, and there is no right or wrong way to do it.
So, don't be surprised if your best choice for broker is one who:
A. Requires every transaction to go through them (including using all state contracts, etc)
B. Takes a fee/cut on every transaction, even if you're a principal
Not saying it has to be that way, but in our experience, that's the way it works with the brokers we're most comfortable using (and who allow us to make the most money). It's a worthwhile trade-off for us.
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Account Closed
Professional Auctioneer · Baltimore, MD · Member since 2015 · 1k+ posts · 1k+ votes
10y
As a buyer and agent, you should have the right to be an investor making a profit without giving your broker a commission. If they insist on a fee because you were smart enough to make a profit using your creates education, I'd either turn in my lic. or find another broker to work for.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:

As a buyer and agent, you should have the right to be an investor making a profit without giving your broker a commission. If they insist on a fee because you were smart enough to make a profit using your creates education, I'd either turn in my lic. or find another broker to work for.
Perhaps as a buyer and agent you *should* have that right, but nowhere in law or regulation are you given that right.
That said, as a buyer and an agent, you have the right to take your business elsewhere or to get your own brokers license if you don't like the commission split that your broker offers. If avoiding a commission split or fee for your own transactions is the most important thing to you, then certainly you can look for a broker who won't enforce that. But, remember, the broker needs to make his/her money somewhere, so if you're not paying commission splits on your transactions, you're probably paying much higher monthly fees.
A broker incurs a lot of costs from the agents s/he oversees -- including liability, training overhead, office supplies, paperwork review, continuing education, etc. In many brokerages, the agents don't pay a monthly fee and the broker is only getting compensated from splitting agent commissions; if the agent only doesn't pay fees when they buy for themselves -- and if they're only buying for themselves -- then the broker who doesn't charge monthly fees is going to lose money.
To summarize my personal opinion on this -- there's no free lunch when it comes to hanging your license. Different brokers will charge different amounts for different things, but you will end up paying for the work/time/risk the broker puts in to manage your transactions. Look at the entire package -- both what you're paying and what you're getting -- and make your decision that way. Don't get tied up in the idea that you should be paying for this or you shouldn't be paying for that.
We are licensed in multiple states and work with multiple brokers, and our payment terms and commission splits are different with each. We've chosen each based on our needs in that state, the number and types of transactions we're doing under that broker and what that broker has to offer us in return.
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