How to avoid taxes with primary income from flipping properties?

Tax, SDIRAs & Cost Segregation
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How to avoid taxes with primary income from flipping properties?

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

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!

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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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  • Kate J.
    Rental Property Investor · Austin, TX · Member since 2016 · 294 posts · 104 votes
    7y
    Originally posted by @Bryce Allen:
    @Kate J. There is a limit on the tax deduction 😉 You can still contribute and backdoor that the same day.

     Could you elaborate? I am reading here https://www.rothira.com/roth-ira-limits

    There is limit of income. If you could give me example with the income of 300k would be great. Say if one takes 18k to ira, is it tax deductible?

    0Reply
  • Bryce Allen
    Rental Property Investor · Milwaukee, WI · Member since 2016 · 62 posts · 28 votes
    7y
    @Kate J. I apologize, I was referring to TIRAA. You can contribute to a traditional IRA at any income level, however you won’t get the tax break. With respect to convertIng a TIRA to a Roth IRA I would search on boggleheads.com for “backdoor Roth”.
    0Reply
  • Kate J.
    Rental Property Investor · Austin, TX · Member since 2016 · 294 posts · 104 votes
    7y
    Originally posted by @Bryce Allen:
    @Kate J. I apologize, I was referring to TIRAA. You can contribute to a traditional IRA at any income level, however you won’t get the tax break. With respect to convertIng a TIRA to a Roth IRA I would search on boggleheads.com for “backdoor Roth”.

    I am still quite confused with Roth IRA vs IRA. Is it correct that in both money grow without paying tax on the profit? Is it correct that we can only contribute to traditional IRA after we pay tax? I should have asked all this to CPA, but my initial feeling was to have evrything in my bank account instead of sending it elsewhere.

    0Reply
  • Bryce Allen
    Rental Property Investor · Milwaukee, WI · Member since 2016 · 62 posts · 28 votes
    7y
    @Kate J. In a traditional IRA your money grows tax “deferred” so you pay taxes when you make your withdrawals. In a traditional account you get a $5500 deduction on your taxes if you make below $115k (?) or about that amount. You also cannot have an employer sponsored retirement program (401k as an example. But, you can contrIbute, you just dont get the deductIon. A Roth IRA is the opposite, you pay taxes on the money today, as in after standard W2 deductions, and then you grow your money without paying any taxes on the growth. However, yes, if you’re a high earner you cannot contribute to a Roth IRA. So one method for high earners is to contribute to a TIRA and then use the IRS allowed “backdoor” contribution to a Roth account. You can leagally do this on the same day. Just search on boggleheads.com for backdoor Roth 😊
    1Reply
  • Erik Hansen
    Real Estate Investor · Portland, OR · Member since 2016 · 29 posts · 16 votes
    7y

    I'm not an expert so don't quote me on the details as I'm merely using my limited experience and suggesting you research the option further but...I would look at transferring/rollover funds into (may trigger a taxable event depending on source) a self directed IRA or open an account and start contributing to one(you'll have to determine eligibility based upon how your treated for tax purposes). Use the funds from that account to fund/flip your projects. You will 'avoid' or defer taxation as long as the proceeds are returned to the account. You will want check writing abilities with the account. Although there are many custodians who offer these types of services my experience thus far, and a positive one at that, has been with The Entrust Group.

    Best of luck!

    0Reply
  • Quito Keutla
    Real Estate Agent · Renton, WA · Member since 2017 · 204 posts · 151 votes
    7y

    Great discussion here, thanks for posting @Clayton Coombs Glad to see you being proactive when it comes to taxes.  I had my fair share of not planning and got hit with a big tax bill, which I'm working on paying off now.  

    0Reply
  • Anthony Andrew Young
    Flipper/Rehabber · Jennings Lodge, OR · Member since 2015 · 22 posts · 10 votes
    7y

    I believe you can eliminate your taxes. The way you can eliminate all of your federal taxes this year, and even eliminate future taxes, is to take advantage of the Opportunity Zones Funding. I'm surprised to see only one other person mention this strategy on this forum post, and no one seemed to respond to his post. 

    You take your current profit and put it into an OZ fund which you can set up yourself. Then you buy a property located in a Opportunity Zone with that fund. As long as you hold onto that property for 5, 7, or 10 years, you can potentially receive unheard of tax benefits, Including the possibility of reducing your original taxes by 15%, delaying the payment for 10 years, & paying ZERO taxes on your additional gains on those new properties!

    Let's say you buy an abandoned building in an OZ to turn it into a Multi-Family. You buy the building for $500k, remodel it for $600k, rent out the units and sell off the building in 10 years. You put $1.1m total into it and 10 years later it's worth $2.5m. You are now required to pay your original tax from 10 years prior, but reduced by up to 15%. And what about your new gain of $1.4m in profit? TAX FREE FOREVER! This may seem too good to be true, but it is apparently very real. If you decide that you may want to pursue this route, please note that I have simplified things and there are further complications and requirements. 

    2Reply
  • Brandon Redfern
    Rental Property Investor · Greer, SC · Member since 2016 · 39 posts · 30 votes
    7y
    @Clayton Coombs Power of Zero was mentioned and it’s the best advice you as a business owner will ever get. Worry less about paying taxes now as taxes are historically low. With our rising debt, SS, Medicare and growing entitlements do you think taxes are going down any further or will they need to go up to pay for all these mistakes? The “rich” are becoming the scape goat for all the problems and it won’t be long till taxes go up for people lIke you. And if you don’t believe that then just think of how AI will possIbly affect the job market In the near future, forcing a lot of people to vote for socialist policies (lIke UnIversal Basic Income), saw the monsoon coming and thought the governments $15 min wage would cure their problems. So yeah if you can find a way to not pay certain taxes then great but don’t just keep kicking taxes down the road, letting them accumulate and end up costing you much more than if you just paid them now. Tax deferral is just getting into a partnership with the Internal Revenue Service and they have controlling interest.
    2Reply
  • Dan R.
    Fort Polk, LA · Member since 2018 · 41 posts · 47 votes
    7y
    @Clayton Coombs The best way to legally avoid paying taxes requires a lot of money to set up and making your records public domain. Set up a foundation that counts as a non-profit/charity, then all your assets are placed in trust under the foundation. Several pro athletes do this as do the Clinton's and Obama's. I'm not a tax pro, I do know that the most effective border wall would be just print a bunch of them and pile them up on the border, it'd scare everyone away. There are people making a living understanding parts of it, on one knows it all. There's bound to be a way to legally reduce what you give the government.
    0Reply
  • Eamonn McElroy
    Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Clayton Coombs There's a lot of great advice on here from all directions.  Some anecdotal...

    Enough to make anyone's head spin.  

    The only universally true answer to reducing your taxes = maintain a strong and active relationship with a competent tax CPA / EA.

    1Reply
  • Allyn W.
    Rental Property Investor · Iwakuni-Shi, Yamaguchi · Member since 2017 · 48 posts · 17 votes
    7y

    @Clayton Coombs there is a great member in the BiggerPockets forums.  Her name is Amanda Han and another member is Brandon Hall.  They did a podcast a while back that was VERY informative.  Here's the link https://youtu.be/SbIIf2ylqm4

    Take a look at it and maybe reach out to one of them.  They may be able to help.

    Kudos to you and your awesome success.

    2Reply
  • Allyn W.
    Rental Property Investor · Iwakuni-Shi, Yamaguchi · Member since 2017 · 48 posts · 17 votes
    7y

    @Clayton Coombs there's also a book out there authored by Amanda Han and Matthew McFarland, "The Book on Tax Strategies for the Savvy Real Estate Investor".  I have this book and it has some awesome information in it.

    1Reply
  • John Cumpton
    Member since 2018 · 11 posts · 5 votes
    7y
    @Clayton Coombs. On the two rentals you own free and clear, I think I would look into a 1031 tax deferral exchange for the future Depreciation and leverage benefits.
    0Reply
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