A CPA would not have said that. Maybe a fly by night tax preparer.
The profits from a flop are ordinary income. Self employment income subject to FICA(15.3%) unless you have a lot of other ordinary income. And the profit is subject to whatever your federal tax rate bracket is. It is also subject to state taxes in most states.
There are no real exceptions to this. Now if you rented the place for a year or so, you could avoid the FICA on the sale income, but you would still pay tax on the rent less expenses.
Find a knowledgeable CPA.
@Emerson Irias Good question. When flipping, the purchase of the house becomes inventory. Meaning you cannot roll your profits into the next deal and receive a deduction. You will not receive a deduction until the year it's sold.
1st Flip: 200k sale of flip-100k costs=100k taxable profit
2nd Flip: Purchase 100k house
Total Taxable profit - 100k (not zero because you purchased another house)
2nd Flip: Sold 200k-150k costs=50k taxable profit
In this simplified example, costs relating to the purchase are not deducted until the property is sold since the house is considered inventory until sold.
Let me know if any clarification is needed.
Thank you all for taking the time to answer my question. Everything you guys are saying sounds familiar and accurate.
@Emerson Irias I know you're question has been mostly answered, but I wanted to echo what some of them said, find a better CPA!!
Thanks, I’m working on finding a CPA here in Jacksonville, FL.
It is my understanding that the timing for when you pay your taxes will depend on the type of business you have set up, but I'm no expert. The CPA that I use can help you get it straightened out. He really knows his stuff. I just PM'd you his info.
There are many moving parts to this question.
Flipping income is considered ordinary income and is also subject to self-employment tax.
With that said - the amount of tax that you will pay will depend on several pieces of information such as your effective tax rate and the amount of the gain. You also need to add self-employment taxes on this calculation.
The good thing is that it appears that you live in Florida and may not have to pay a state income tax.
You may be required to make an estimated payment(4/15, 6/15, 9/15 or 1/15) depending on the quarter that you earned the income.
However, there are certain exceptions that you can make the payment by 4/15 when your tax return is due without being hit with any penalties or interest.
Only your accountant who has your information can answer the question whether you are required to make the payment by 9/15/18 or 4/15/19.
Thank you. I have a full time job, I do flips part time. I’m aware of paying tax at my rate plus SET up to 118k and 2.9 after that I believe. I did contact a CPA recommended by family, but I think he may not be for me. I was told I could wait for 24 months to pay tax on profit and if I invested I won’t have to pay it at all. To me that sounds crazy, the government wants their money they so hard worked for. I actually thought I had to pay quarterly, but sounds like if you doing flips full time I should, but I have full time job so paying 4/15 sounds even better. I’ll be looking for a new CPA this week. Thank you once again.
Why hasn't anyone mentioned a 1031 tax exchange? Am I missing something?
Btw, @Emerson Irias , when you mentioned that the government wants their money they so hard worked for...I hope that was sarcasm.
1031 will not work for a flip, only for a rental. You can sell a rental and invest the proceeds of the sale to buy a similar investment. Thanks
Or am I wrong Tony? I will invest the money again, on a property of similar or higher value! Let me know what you think.
Thank you Jack I’ll keep that in mind.
@Account Closed , I have not attempted a 1031 exchange yet, so I can not speak from experience.
@Tony Figurelli Thanks for posting that article. That article is correct but it's referring to property with the intent to hold for investment (longer than 1 year, maybe even longer than 2 years) and rent to tenants (in our real estate context).
In our thread here, fix and flipping, the intent generally is to fix up and flip well under 1 year for profit. The house is treated as "held primarily for sale" and is not considered an investment in the eyes of the IRS.
Let me know if I can clarify anything.
@Tony Figurelli , Everybody's singing off the same page here. If your intent is primarily to sell (a fix n flip) then you can't do a 1031. If your intent is primarily to hold for productive investment use then you can use a 1031 when you sell and defer the tax indefinitely. @Emerson Irias , as @Basit Siddiqi said there's some leeway but that two year thing by the other CPA is bogus. Again, everyone's saying the same thing.
Here's what I can add to the discussion - If you want the opportunity to avoid paying that tax and ultimately lowering that tax if you ever do pay it then you simply need to adjust your flipping model. Instead of buying property primarily to fix up and sell you buy property intending to fix up and hold. Instead of fix in flip you fix n rent n evaluate. There's no statutory holding period. Most folks feel comfortable at more than a year. And I know to an adrenaline fix n flip junkie that feels like forever. But if you add one thing to the process - fix n rent n refi n evaluate you give yourself to get the next flip (excuse me - long term hold investment) going while the current one seasons for you to sell and 1031.
It takes a little patience but just moving the tax from ordinary income to capital gains is huge. and when you add to that the opportunity to defer that tax forever it's a winner of a strategy.
Thank you @josh lewer and @dave foster. Good info!
Hi everyone , that’s very interesting strategy I wil defenately look in to it. Sounds like great tax savings.