How much do you pay in taxes on flip profits?

Question

Here's my scenario, I just started flipping this year, I'm flipping under an LLC, I'm on my second flip - first one went well second one is going OK. I will own the second property for about 4 months (hopefully, its not sold yet - flip is in progress) the first property was owned for 7 months. I'm giving this information because every time I ask this I get different answers based on length of owner ship etc... So its a basic question, how much will I be taxed from the IRS on the profits from these two flips next year on my taxes (% wise). Isn't flipping under an LLC like running a normal business where the tax amount is total year sales - total year expenses = profit, then taxes are profit x tax rate? I've had people tell me the profit for each flip is taxed at the capital gains rate, but wouldn't that apply if you are flipping under your person and not a business?

Christian Wathne · Answer

This is the exact reason I generally got out of flipping and moved to the BRRRR

28% marginal fed tax rate

+ 15.3% social security & medicair

+ 9.3% California marginal tax rate

= 52.6% tax....absolutely ridiculous

Brandon Hall · Answer

Your flips will be taxed first on Social Security and Medicare (15.3%) and then at your marginal tax rate. If you also include state taxes, you can easily get above an effective tax rate on your flipping profits of 50%.

Depending on how much profit you are showing, you could have an LLC that elects to be taxed as an S Corp to reduce the SS and Medicare liability.

Dave Foster · Answer

@Brian Egr, 1031 is your answer. But you've got to purchase the properties with the intent to hold for productive use not to flip. Flipping is ordinary income tax plus self employment plus aca surcharge. As @Brandon Hall said And the real bummer is that technically if your intent is primarily to resell going over the one year mark won't change that. But if your intent is to hold then one year turns your gain from ordinary income to capital gain. And you have the opportunity to 1031 into your next investment.

@Christian Wathne's model is perfect for minimizing taxes. It feels like it would slow you down but the "R" of refinance allows you to buy your next profit as soon as you value add to your acquisition. Then your properties kinds of back fill waiting behind for you to sell 1031 and buy more when you're ready. The two big differences are that you get tax relief and while they are waiting the properties are throwing off cash flow to you.

Russell Brazil · Answer

Flips are always earned income. How long you hold it has zero impact on that.

Brian Egr · Answer

OK, thanks for clearing that part up. So I'm operating under as a S corp, and I have a regular day job, so the taxes from the LLC will just be taxed at whatever rate I end up at when all my income is added up at the end of the year, right? Profits added as income to my 1040 with a K-1, is that right?

Brian Egr · Answer

@Brandon Hall Is there an option to avoid paying all that tax? 1031 as much as you can?

Brian Egr · Answer

OK, so that sounds like they add self employment tax in on top of everything?

How much do you pay in taxes on flip profits?

How much do you pay in taxes on flip profits?

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