Hey guys, I've been a full time real estate agent for several years now and up until this year that has always been my primary income. However this year I focused more time flipping properties than selling real estate as a real estate agent. I will net approximately $250k from flips and $50k from real estate sales this year. I do own 3 rental properties (free and clear) however I just picked up 2 of those in the last 6 months... My concern is that I will probably have to pay $80-100k in taxes which never looks appealing. I did meet with my CPA but he wasn't much help. He told me that most people would love to be in my shoes with little debt and good income. Although I understand I am very fortunate that's not the advice I was looking for from my CPA. I am now looking for a new CPA and figured there are lots of professionals flipping properties on Bigger Pockets and felt this would be a great place to get some advice on strategies to lower taxes and find a good CPA & accountant. Taxes to me are like a foreign language... I do track all my expenses but the tax code makes no sense to me... Thanks in advance for any help!

Hello. I am new to this site but have been investing in both flips and long term holds for the past 14 years. Own over 30 properties and own a couple of businesses. To buy a property in hopes of appreciation sounds like the same advise I heard from everyone while living in CA back 2006. Back then the so called next door investor whether it was the waitress at Dennys or my Mailman everyone was telling me how they bought a house in X city, with little or no money down and is loosing $500 per month while renting it out but that was not a problem because they felt it was a small price to pay given the upside in appreciation. All they had to do is sale in one year and they would make $50-$100k. I never considered that investing. Investing in my option is to make money the day you buy. Sure there is value play and other methods but in this market it is just too hot to think values will keep going up. One day and it can be 3 months or in a year but there will be alot of investors left standing when the music stops during musical chairs in this market. Buy, Buy, Buy.. who cares if you dont make any cashflow because you are banking on appreciation. I have always treated Appreciation as a bonus and never bought a deal in hopes of appreciation. What Flippers need to know if you sale more than 5 in one year you will be considered a Dealer. IRS taxes the heck out of you thus many dont realize they loose alot of their "profits" to taxes. As a Flipper you have gotten yourself a job not a business. I like that you are cautious and dont want debt but real estate is a leverage play. If you talk to any SUPER successful old timer who has over $10 million net worth you will hear they used some leverage but did not bet the farm on any one deal. They did not over leverage. In real estate you make your money on the purchase. If you buy correct and are well capitalized you can push through the down markets. Some good points made here about using S corp to reduce SS and employment taxes. I would suggest getting a small mortgage on your investment properties no more than 60-70% thus giving you some cushion if the market goes south. Another strategy might be to do the BRRRR method as that will give you conservative loan to value but you dont sale you keep and make monthly cashflow from each deal while increasing your net worth. The bank looks at your Financial Statements to determine your risk. FS is like the adults report card when they come into adulthood. Having a high net worth helps to open doors. Having high income from flipping is not always a good thing for bankers. Also another option that I have been hearing but I personally dont use is using self directed IRA. The money has to go back into that account including profits but you might be able to pay yourself as a Project Manager thus giving yourself a good salary while growing your cash from one flip into another and thus building a great retirement account. You can always dip into it and pay the taxes/penalties as you take out so not like you cant access until you are at legal retirement age. Sorry for the long response but just think people forgot what happens when markets turn and all this easy money goes away. It was not long ago that all the over leveraged, banking on appreciation investors walked away from their investments when that play was no longer feasible. One last point, as many others said you have to do smart tax planning ahead of time to do it right and legit. Trying to do after the fact is tough. If you end up paying the taxes just remember you are a business and not employee so you can take all the deductions to run the flips. Keep up the great job and keep finding yourself great deals that you can make money from. L

@Clayton Coombs @Matt Ward @Eamonn McElroy @Luciano Armani I do want to congratulate Clayton on having a really great year! First, I wanted to thank everyone here that offered advice that I did not @ Mentioned. Of course, however, that the reader of this thread really needs to understand this is a very complex topic and not all advice should be taken, but all should be researched thoroughly. Second, I mentioned Luciano mainly because I do understand where he is coming from when he mentioned that the advice of buying for low cash flow AND high appreciation hurt him or others who have followed that strategy in the past. Rest assured, there will be others that will be hurt by the low, no or negative cash flow AND high appreciation strategy in the future. BUT there will equally be those that will be hurt by buying high cash flow and NO appreciation as well. There is no monopoly of hurt by buying with the no cash flow high appreciation strategy. I personally know quite a bit of people who have been hurt by buying cash flowing properties where the cash flow suddenly disappeared when unemployment skyrocketed. Now, many of us got into the Real Estate game one way of another and many of us will encounter Rich Dad, Poor Dad. While I don't really think of his advice as fantastic, he makes some really good points, including this one: Note where the Self-Employed quadrant is. Note how he is dressed on each side. The funny thing is that should you follow the advice from this diagram, and you actually make your way into the Investor quadrant, not only does your Money work hard for you (and you get to play a lot of golf), but you will AVOID paying a lot of taxes until you sell the Investment, and in the case of Real Estate, you can exchange until you die, or hand it down to your children at a stepped up basis. Flipping to me is a job. Buying sound, good, quality Real Estate where you don't do much work because it's highly desirable, where the job market is very strong even in a down market, AND you hardly have to put any time into it because it runs like a well oiled machine, puts you in to the Investor's Quadrant, paying very little taxes until you die. Over my 21 years of buy and hold Investing in Real Estate, while I was doing this before reading Rich Dad, I always understood that the way to avoid paying taxes is to be in the Investor's Quadrant. Unfortunately, many people either confused or ignored the concept of what an Investment really is. The MORE you work, the more your Investment is a Business. The LESS your work, the MORE your investment IS AN Investment. I mentioned Eammon and Matt here because they gave the advice of low cash flow, high appreciation as a tax avoidance strategy. In this case, that IS what I have practiced over 21 years. What they gave in theory is what I do in practice. AND IT WORKS. The one gotcha is the dangers of a down market. This is why you have to be very smart and use the gift you have been given that separates you from the animals. OR... even if you don't want to separate yourself from the animals, then think like a Squirrel! Squirrels know that if they don't put away their nuts for the winter, by the time the winter comes, they may not make it through. The Squirrel needs to think about the FUTURE because he isn't gathering his nuts to eat it NOW. It's this thought that allow him to weather the winter. Us INVESTORs (by the way, I don't consider too many people Investors if they are owning Real Estate but are doing a LOT of work for it, those people have a job), in order to be good, need to think about the FUTURE, in my case, at least 10 years out, and always saying to myself, how many NUTS do I have to put away to weather the intensity of the WINTERs that I see in the FUTURE? Since I'm from NYC and I buy in quality neighborhoods, over the several Economic WINTERs that I went through, the NUTS (Investments) that I have GATHERED have done so well, I slept like a Baby in my little squirrel hole, AND, I have successfully avoided paying a lot of Tax by utilizing the tax loopholes (think 1031 Exchanges, holding onto the Investments as you get taxed only if you sell, etc.). I don't want to change the topic, but to me, Flipping is at BEST a business, and businesses pay Tax, which is unavoidable. INVESTMENTs are you tax shelters. You decide which quadrant you want to be in.

How to avoid taxes with primary income from flipping properties?

Carl FischerPro Member

Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes

7y

@Clayton Coombs

Taxes are a privilege of those who work for a living—-welfare and food stamps is a reward for those who don’t work.

Vote for people who don’t want to keep raising taxes. Consider it a cost of doing business.

I use tax free and tax deferred accounts to minimize my taxes. I Have circumstances that allow me to withdrawal without taxes or penalties.

[email protected]215-283-2868

15 Reply

Clayton Coombs

OP

Flipper/Rehabber · Glendale, AZ · Member since 2016 · 64 posts · 69 votes

7y

Thank you Carl, I completely agree.

I contribute about $18,000/ year towards my roth solo 401k and about the same about the same to my traditional sep IRA. I understand the traditional IRA gives me tax benefits now and the roth will give me benefits in the future. However I still have a lot of years left before I can start drawing from those accounts. I did recently make them self directed so I can use them with some real estate investments but ultimately those accounts are still a little low without getting a loan.

6 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

welcome to the world of making money.. you could buy rentals that will give you some shelter..

but if your going to make big dollars either in commissions or flipping you pay tax.. simple as that.

and by paying tax you look very good to lenders who will allow you to scale up.

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23 Reply

Keith Gilbert

New England · Member since 2018 · 43 posts · 21 votes

7y

@Clayton Coombs Hi! I’ll be curious to see what you get for potential options here. In general, short-term active income is going to be taxed at regular rates. As such, the primary option is to either save (which it looks like you’re doing) or offset with expenses. Since you’re flipping, no depreciation benefits.

1 Reply

Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

7y

Originally posted by @Clayton Coombs:

Thank you Carl, I completely agree.

I contribute about $18,000/ year towards my roth solo 401k and about the same about the same to my traditional sep IRA. I understand the traditional IRA gives me tax benefits now and the roth will give me benefits in the future. However I still have a lot of years left before I can start drawing from those accounts. I did recently make them self directed so I can use them with some real estate investments but ultimately those accounts are still a little low without getting a loan.

You can do few things:

1) Start to leverage more rentals so the you can offset rental loss againsts your income. You will have no limitations as you are a real estate professional. But a rentals that’s has more equity appreciation( In a nicer area), they will either break even Cashflow and will give you taxloss via depreciation.

2) depending on your situation, start hiring your family member to shift income to Lower bracket or with no tax. . That way kids can fund their own education and even retirement accounts starting now rather than you funding their school/college via after tax money.

3) you need to be contributing towards qualified profit sharing plans via your businesse. You can shelter more than 60k for you, and may be 60k for your spouse, if your entity is structured properly to make it happen.

4) hopefully you are running your flips via S -crop to save on self employment taxes.

You need to talk to a good Professional.

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43 Reply

Dmitriy Fomichenko

Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes

7y

@Clayton Coombs, you've got some great advice already, I love Carl's suggestion to vote for people who don't want to raise taxes!

Continue deferring max you can into retirement account. Be sure to work with competent and knowledgeable CPA who can review your overall situation and provide guidance you need.

3 Reply

Matt Millard

Lewisville, TX · Member since 2015 · 344 posts · 264 votes

7y

Try reaching out to Mia Anne Reaves. I’m considering switching to her service to cut my future tax bills. She’s pretty active & helpful on BP here too!

2 Reply

Kevin Dong

Flipper · Fort Myers, FL · Member since 2017 · 182 posts · 98 votes

7y

There is no way around it. . but honestly I would rather paying much more tax because that means I make lots of profits resulting in the high tax

3 Reply

Clayton Coombs

OP

Flipper/Rehabber · Glendale, AZ · Member since 2016 · 64 posts · 69 votes

7y

Originally posted by @Kevin Dong:

There is no way around it. . but honestly I would rather paying much more tax because that means I make lots of profits resulting in the high tax

I used to think the same thing but once I got in this position things change. Although it looks like I made a bunch of money my lifestyle and bank account have remained the same. All profits were re-invested in which I hope results in more growth but realistically could also go the other way. It's tough watching your hard earned money go towards things you don't agree with. I do believe everyone needs to pay their fair share but sometimes it feels I'm being penalized for the 60-80 hour weeks that I have to put in to make this money. In my eyes a dollar saved is a dollar earned which is why I'm trying to get some help saving my hard earned dollars.

10 Reply

Clayton Coombs

OP

Flipper/Rehabber · Glendale, AZ · Member since 2016 · 64 posts · 69 votes

7y

Originally posted by @Jay Hinrichs:

welcome to the world of making money.. you could buy rentals that will give you some shelter..

but if your going to make big dollars either in commissions or flipping you pay tax.. simple as that.

and by paying tax you look very good to lenders who will allow you to scale up.

You are correct about the rentals which is one of the reasons I purchases 2 more this year. However until I have a good amount of rentals under by belt I don't think it's going to help too much.

It has been easier to get a loan compared to years past because of the extra income but I'm not really excited about taking on more debt... Although leverage can certainly help build wealth much faster and interest is a write off, I get nervous taking on additional payments. Certainly something to think about.

0 Reply

Clayton Coombs

OP

Flipper/Rehabber · Glendale, AZ · Member since 2016 · 64 posts · 69 votes

7y

Originally posted by @Ashish Acharya:

Originally posted by @Clayton Coombs:

Thank you Carl, I completely agree.

I contribute about $18,000/ year towards my roth solo 401k and about the same about the same to my traditional sep IRA. I understand the traditional IRA gives me tax benefits now and the roth will give me benefits in the future. However I still have a lot of years left before I can start drawing from those accounts. I did recently make them self directed so I can use them with some real estate investments but ultimately those accounts are still a little low without getting a loan.

You can do few things:

1) Start to leverage more rentals so the you can offset rental loss againsts your income. You will have no limitations as you are a real estate professional. But a rentals that’s has more equity appreciation( In a nicer area), they will either break even Cashflow and will give you taxloss via depreciation.

2) depending on your situation, start hiring your family member to shift income to Lower bracket or with no tax. . That way kids can fund their own education and even retirement accounts starting now rather than you funding their school/college via after tax money.

3) you need to be contributing towards qualified profit sharing plans via your businesse. You can shelter more than 60k for you, and may be 60k for your spouse, if your entity is structured properly to make it happen.

4) hopefully you are running your flips via S -crop to save on self employment taxes.

You need to talk to a good Professional.

Great advice! I will certainly take all of that into consideration!

1 Reply

Mary M.

Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes

7y

Originally posted by @Clayton Coombs:

I used to think the same thing but once I got in this position things change. Although it looks like I made a bunch of money my lifestyle and bank account have remained the same.

Lol! I think this is pretty common :) more money doesnt seem to equate with feeling like i am any different than say, 10 yrs ago. I have the same lifestyle, and feel like I dont really get any benefit from my earnings. i have heard similar from others that really started earning a lot more than they were used to i guess this is how super wealthy folks can say they dont feel wealthy

2 Reply

Mary M.

Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes

7y

The rentals should give you depreciation which will lower your taxable income.

0 Reply

Clayton Coombs

OP

Flipper/Rehabber · Glendale, AZ · Member since 2016 · 64 posts · 69 votes

7y

Originally posted by @Mary M.:

The rentals should give you depreciation which will lower your taxable income.

Yes, I am expecting some depreciation although I'm not sure if they can depreciate over the full year considering I've owned 2 of my 3 rental for a couple months now. It would help if they had a mortgage so I could write off the interest but I feel more comfortable not having a mortgage payment in case things go south.

1 Reply

Eamonn McElroy

Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes

7y

@Clayton Coombs

You and your CPA (or new CPA) need to be talking in the next week or two about year-end planning.

Based on what you've laid out so far, that discussion should focus on your potential QBI deduction and if you're above the threshold amount (and therefore phased into the limitation). If you are, lowering taxable income to get below the threshold amount, or making an S election and paying out wages become front-burner priorities.

There are roughly 5 weeks left in the year, I would get on it...

5 Reply

Mary M.

Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes

7y

Well you would have to pay for the interest to be able to write it off so it is tax nuetral.

0 Reply

Clayton Coombs

OP

Flipper/Rehabber · Glendale, AZ · Member since 2016 · 64 posts · 69 votes

7y

Originally posted by @Eamonn McElroy:

@Clayton Coombs

You and your CPA (or new CPA) need to be talking in the next week or two about year-end planning.

Based on what you've laid out so far, that discussion should focus on your potential QBI deduction and if you're above the threshold amount (and therefore phased into the limitation). If you are, lowering taxable income to get below the threshold amount, or making an S election and paying out wages become front-burner priorities.

There are roughly 5 weeks left in the year, I would get on it...

Thank you. Yes it's my primary focus which is why I started a discussion on here. I was hoping to get it all resolved a couple weeks ago when I met with my CPA but I didn't get any advice which is why I'm wanting to meet with someone else. I appreciate all the advice I have received so far!

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

You could always buy a new airplane and take section 179 bonus depreciation I have done that over the years..

but I love to fly and you make no money with them its a temporary fix..

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4 Reply

Eamonn McElroy

Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes

7y

@Jay Hinrichs IRC Sec 162 "ordinary and necessary"

Depending on OP's risk tolerance and sleep, it might make sense to take advantage of his (I presume) real estate professional tax status and invest in low to no cash flow, high appreciation real estate assets with leverage that will produce a material tax loss.

Answer as always: it depends.

3 Reply

Mark Nickoson

Rental Property Investor · Dayton, OH · Member since 2015 · 79 posts · 85 votes

7y

@Clayton Coombs, My advice is to pepper your flips with an occasional buy and hold. I've been doing my own taxes for years. I've hated it. It has taken me way too long and I've missed a few deductions along the way. But, I think it was worth it for me learning the principles. You'll need to learn the principles too, because it is up to you to provide the receipts for your purchases and your activities. Here are a few things I'd recommend reading:

IRS Publication 527 Residential Rental Property

Pub 535 Business Expenses

Pub 551 Basis of Asset

Pub 583 Starting a Business and Keeping Records

Pub 587 Business Use of Home

Pub 945 Depreciation

If you are just flipping, you won't get to use some of these concepts, but the more units you own, the more depreciation becomes your friend. There are advantages and disadvantages of corporations. Your CPAs and lawyers can help you with those concepts.

Don't forget to get @Amanda Han's book here on BP. She's done a few podcasts too.

I like @Carl Fischer's strategy of using funds out of Self-directed IRAs, but I haven't used it yet.

Use 1031 Exchange when you can.

Hopefully someone can advise you better for purely flipping.

Mark

13 Reply

Pratik P.

Flipper/Rehabber · Sacramento, CA · Member since 2016 · 807 posts · 815 votes

7y

@Jay Hinrichs That's really cool that you do that! I've thought about it myself as I'm working on my PPL at the moment. I'm just wondering if that'll fly as a business expense. Maybe if I have business/deals in different cities??

1 Reply

Brookshire Harris

Raleigh, NC · Member since 2018 · 46 posts · 34 votes

7y

I had a discussion with my CPA in hopes of being where you are in 2019. I like how you used the word "avoid" taxes because she and I talked specifically about those strategies and she gave me some big tips for the upcoming year. Most have been recommended in this thread actually.

But what I took away is that Tax Avoidance is something we can all do... legally... and there is some very valuable advice that the community is giving here. She emphasized that there is a difference between tax avoidance and tax evasion. And that Tax Evasion is *illegal* and happens when taxpayers deliberately misrepresent their income or deductions to reduce their tax liability. So I can appreciate your question and certainly thank the contributors for their suggestions to consult a CPA, legally leverage tax laws, & stay in compliance to reduce our tax burden.

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Originally posted by @Pratik P.:

@Jay Hinrichs That's really cool that you do that! I've thought about it myself as I'm working on my PPL at the moment. I'm just wondering if that'll fly as a business expense. Maybe if I have business/deals in different cities??

it sure does as long as you are looking at deals all over CA.. that's why you see many smaller or regional builders and small business or medium size business owners have their own aircraft.. to go to their different operations or scout new deals etc etc.

And were this OP is located in FLA that's small plane heaven with a small aircraft that would open up the whole state to his operation.

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1 Reply

Eric Nurmi

Specialist · IL · Member since 2018 · 47 posts · 42 votes

7y

@Clayton Coombs Ive pulled my money out of my 401k. I found I could do better with it than the market could. Also, as an entrepreneur, I didn’t like having my cash in something that restricted my control of it.

4 Reply

Eric Nurmi

Specialist · IL · Member since 2018 · 47 posts · 42 votes

7y

@Clayton Coombs a friend of mine has strategies I’m using to significantly lower my taxes. There are new laws coming into effect this year that we can take advantage of and even use for 2018. I sent you an email.

3 Reply

How to avoid taxes with primary income from flipping properties?

How to avoid taxes with primary income from flipping properties?

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