Originally posted by @Brian M Sweeney :
@Javier Pinedo consider a SEP IRA for self employed individuals. This will help defer taxes but not eliminate them.
Are profits from wholesaling treated as short term capital gains then? Does it have any impact if the property was taken into an entity vs simply assigning the contract?
@Javier Pinedo , couple things to consider:
Investing inside of an IRA will shelter income/gains from taxes, however that only applies to passive income. Wholesaling would be considered trade or business and income from an active business inside of an IRA will be subject to Unrelated Business Income Tax. Be sure to understand the tax implications before doing this activity inside of an IRA. Ideally, you'd want to invest passively with your retirement account, couple examples will be owning a rental property or doing private lending.
Based on the above it would be best to do the wholesaling outside of a tax-deferred vehicle, but use profits from this activity to contribute into truly self-directed Solo 401k. With contribution limit of $55,000 per participant for 2018 you can probably shelter most of your income from wholesaling into your retirement account instead of paying it to uncle Sam, then grow your wealth in tax-deferred environment.
If you generate earned income from self-employment activity, then a solo 401k is a great way to save on taxes. Contributions are tax deducible and for 2018 can be as high as $55,000 or $61,000 if age 50 or over.
Solo 401k assets accumulate earnings on a tax-deferred basis. As with plan contributions, earnings on contributions are not taxed until a distribution from the solo 401k plan actually occurs.
I agree a self-directed IRA or Solo 401k are among the best ways to shelter income and invest tax-deferred into real estate. Those who are self-employed (wholesaling generally qualifies) can get the additional benefits of the Solo 401k including:
- Compared to an IRA, Solo 401k contributions limits are roughly ten times higher.
- There is no custodial requirement for the 401k.
- You don't need the additional expense and administration of an LLC to have checkbook control.
- There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.
- A spouse can also participate in the same Solo 401k plan.
- The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage.
- The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)