W2 job and flipping homes and taxes

Tax, SDIRAs & Cost Segregation
10yFollow

W2 job and flipping homes and taxes

Vladimir K.
Real Estate Agent · Wheaton, IL · Member since 2008 · 66 posts · 32 votes

This is a hypotethical question for me that I did not see answered.  As I understand it, buying a property with intent to flip it quickly, for a profit, makes one a 'dealer' in the eyes of the IRS.  

Dealer is someone who makes a living off buying properties, and must, therefore, pay an additional self-employment tax (if I understand this correctly). However, what if a person has a full time job and is not earning a living by being self-employed? Would they need to pay this additional dealer/self-employed tax? I understand that the solution is to create an LLC (or S Corp, etc...) and flip using that entity, however, will this hold true for just 1 or 2 flips a year?

0Reply
28 views

Most Popular Reply

Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y

@Vladimir K., you'd still get hit with S.E. tax if you flip in a wholly-owned LLC. An S corp would offer some protection, but if it's actually worth it is very situation-specific and depends on other factors including how much income you receive from your W-2 job, etc.

Clarita CPA Group516 Reviews
WebsiteView Page
1Reply
See this reply in the discussion

9 Replies

Jump to latestLatest
  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    @Vladimir K., you'd still get hit with S.E. tax if you flip in a wholly-owned LLC. An S corp would offer some protection, but if it's actually worth it is very situation-specific and depends on other factors including how much income you receive from your W-2 job, etc.

    Clarita CPA Group516 Reviews
    WebsiteView Page
    1Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    10y

    you "may" be able to avoid "some" tax if you go the corp route by paying yourself a salary. doing 1 or 2 flips a year would probably not constitute a salary though.

    if you have a day job, and do 1 flip a year, you still gotta pay the federal, state, and BOTH sides of the SE tax.

    for me, that came to around 44%. but I want to pay taxes. means I meant $.

    put it to you this way - at your day job, you're probably paying around 37% in taxes. you just don't notice it as much as it comes out of your paycheck each week.

    1Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    My understanding is flipping 2-3 per year would not get you into dealer status, but talk to a CPA who will give you a credible answer.

    1Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    10y

    my understanding is even if you only do one flip during your lifetime and have a day job, you have to pay the fed/state/SE tax.

    it's inventory. buy it, fix it up, and sell it. that's a business - not a stock.

    that's how the IRS would view it, IMO. And that's what I've read on BP w/ the CPS's who specialize in real estate investing.

    1Reply
  • Vladimir K.
    OP
    Real Estate Agent · Wheaton, IL · Member since 2008 · 66 posts · 32 votes
    10y
    Originally posted by @Scott W.:

    you "may" be able to avoid "some" tax if you go the corp route by paying yourself a salary. doing 1 or 2 flips a year would probably not constitute a salary though.

    if you have a day job, and do 1 flip a year, you still gotta pay the federal, state, and BOTH sides of the SE tax.

    for me, that came to around 44%. but I want to pay taxes. means I meant $.

    put it to you this way - at your day job, you're probably paying around 37% in taxes. you just don't notice it as much as it comes out of your paycheck each week.

    Just to clarify, what if a person makes 50K W2 and 40K flipping, if they have an LLC, their SE income is 40K, correct? If they don't have an LLC, what then?

    0Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    10y

    I'm not a CPA nor do I play one on TV but if I had to guess, with no LLC, and $50k W2 job, all $40k would be subject to SE.

    With LLC, I'd just guess all $40K would be subject to 40k as well.

    @Steven Hamilton II & others would know better than me though.

    0Reply
  • Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    10y

    @Scott W. @Vladimir K. flipping inside or outside of an LLC will have no effect on the tax liability unless that LLC is being taxed as an S-Corp. So you can flip in your own name or an LLC and the tax liability will be the same.

    Here's a BP Article I wrote on the subject. It is possible you can avoid dealer status and demonstrate investment intent, but not likely if you establish and maintain a pattern of flipping homes.

    1Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    10y

    I've read your artilcle MANY TIMES. Love it.

    so If I do one house and my intention all along was to flip it, I pay the SE tax, correct?

    1Reply
  • Sarah Ziehr
    Real Estate Broker · Chicago, IL · Member since 2015 · 531 posts · 266 votes
    10y

    Either way it is income and you must pay taxes.

    Logon to Turbo tax and play a couple different scenarios around. You can then decide if you want to establish an LLC and pay yourself out of it.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free