Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
Hi, I was watching a kiyosaki vid, and I heard him talk about Jared Kushner not paying taxes in regards to 3 forms of income. I’m not totally sure what’s being said here and I’m not asking for the “safe” “sounds really legal and compliant” answer necessarily. I want to know, is there loopholes on RE through owning a business that would keep you from paying taxes at all on a flip or does that only pertain to rental properties, or none of the above? Or to be specific, I’m curious if there’s a way to legally write off the profits of a house flip, if there is a connection with the use of the house to say a construction business during the time of ownership. I’m not looking to break laws; just asking about what’s possible with the existing tax laws.
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
Prepare for a highly opinionated rant.
First, @Account Closed, stop polluting your brain with Kyosaki, Grant Cardone etc. They do not teach business. They are mindset gurus preaching how you're entitled to be wealthy yada yada yada. And they make good money from preaching and products. I know crowds love these motivational shows and books, but I don't. Most successful investors that I know did not need to be high on these motivational drugs.
Jared Kushner does not do flips, I suspect. Flipping is a job. A very hard job, with very unpredictable results and very high taxes. Wealth is built with rental properties, not flips. Most of the tax benefits come on the rental side, too.
Wholesaling or flipping may be necessary if you need to make current money to live on. Profits from such businesses are taxed high and cannot be "written off" or otherwise magically shielded from taxes by any legitimate approach. You may be able to somewhat reduce taxes thru some tax planning but never eliminate them.
Also, I cannot agree with your thinking that giving up 50% of the profits to the govt is a deal breaker. Would you rather have $0 taxes and $0 left for you or $25k for you and $25k for the govt? Yes, the less taxes the better obviously, but high taxes should not stop you from making money.
Financial Advisor · CA · Member since 2012 · 128 posts · 76 votes
7y
I choose to be an investor. I do not have to pay social security on my proceeds. I write off my rental costs such as taxes, maintenance, and other expenses against rental income. Also depreciation goes against income. No need to pay social security on real estate income if you are an investor. If you are claiming a "business" of real estate this implies you "work" in it so many hours per week. You can still write off expenses against rent but you need to pay social security tax on real estate "income." Also regular income tax on that income. The social security tax right off the top is something like 15.63 percent. This means for every $1000 of income you pay $1000 x .1563=$1563 in social security tax and THEN you have to pay regular income tax. Now if you don't outright "sell" your property, but instead do 1031 exchanges this is all deferred on real estate property sales. However "income" in real estate could come from rents, from property management, from air bnb, and so forth.
I suggest you purchase Lassers Tax Guide and read the part that pertains to this. They have a new version every tax year. Best $40 I ever spent.
Pittsburgh, PA · Member since 2016 · 7 posts · 4 votes
7y
@Jonathan Greer
Flipping definitely has tax consequences, but I believe you’re referencing more of a long term hold strategy where depreciation and passive losses come into play.
It might be advantageous to keep certain properties as long term hold rentals with a management company. You can slowly build up multiple revenue streams while allowing the flipping to fund the long term hold side. Over time you’re passive rental income can be the long term play. It does take time to build so patience is a virtue. It looks like your California which means it could take longer due to the price values expanding, however you can invest in the Midwest as well.
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Account Closed
I'm not sure if you're using different (and uncommon) terminology, but:
One doesn't simply choose to be an "investor" in real estate vs in the "trade or business" of real estate. It's based on the facts and circumstances.
Being in the trade or business of rental real estate generally does not subject the rental taxable income to SE taxes... Rental real estate is not subject to SE taxes unless (1) the taxpayer is a dealer and the property is used in the taxpayer's ordinary trade or business as a dealer, (2) the taxpayer is renting out farmland under very specific fact patterns, (3) hotel-like services are provided with the rental, or (4) the taxpayer is renting space in parking lots, warehouses, or storage units. This is pretty clear under IRC Sec 1402 and the related regs...
The SCOTUS Groetzinger case has made clear that there is no set amount of hours to reach trade or business status (there is no "so many hours per week").
The SS portion of SE taxes is 12.4% and the medicare portion of SE taxes is 2.9% for a total of 15.3%..
Financial Advisor · CA · Member since 2012 · 128 posts · 76 votes
7y
Eamon- McElroy
not sure if you're using different (and uncommon) terminology, but:
One doesn't simply choose to be an "investor" in real estate vs in the "trade or business" of real estate. It's based on the facts and circumstances.
I actually do choose to be an investor. I choose not to work as an employed real estate person.
Being in the trade or business of rental real estate generally does not subject the rental taxable income to SE taxes..
There are different types of rental income. Check your sources.
. Rental real estate is not subject to SE taxes unless (1) the taxpayer is a dealer and the property is used in the taxpayer's ordinary trade or business as a dealer, (2) the taxpayer is renting out farmland under very specific fact patterns, (3) hotel-like services are provided with the rental, or (3) the taxpayer is renting space in parking lots, warehouses, or storage units. This is pretty clear under IRC Sec 1402 and the related regs…
I recommended Lasser's Tax Guide. I was not trying to dissect a frog. People could wind up being a dealer and not even be aware of it.
The SCOTUS Groetzinger case has made clear that there is no set amount of hours to reach trade or business status (there is no "so many hours per week"). Yeah. Review your answer to question 1 above.
Yeah. I know. I figured Lasser's would help in that area.
The SS portion of SE taxes is 12.4% and the medicare portion of SE taxes is 2.9% for a total of 15.3%
I know. I know. But I think you MISSED THE POINT!!!!
Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
7y
@Carlo Finotti very good point. I’m appreciating all the wisdom here and the options. We are in the Midwest, and right now I guess you’d call this the east in Tennessee. I’ve got 2 flips to do right now and I’m hoping the returns won’t be disappointing. It’s really tough to flip when you’re just trying to build the piggy bank for LTR. Trying to do high end flips in a questionable area is a little risky because of the time it takes to accomplish custom.
Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
7y
@Erik Whiting man, thank you so much for the lesson on cap rate and everything you’re explaining! I’m going to be studying this thread for a while making sure I have this stuff down! It looks like we are wanting to make SW MO home in the next year after we flip our houses out east. Nice to see you’re from that area.
Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
7y
@Karen Lee perfect! Thank you for the breakdown. I’ll have to check out that book. I’m going to be returning to this thread for a while to study the recommended readings!
Then you should know he was talking out of his a$$. Using leverage to invest isn't some tax shelter strategy. You pay taxes on the income and the gain when you sell it.
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
7y
Originally posted by @Account Closed:
Eamon- McElroy
not sure if you're using different (and uncommon) terminology, but:
One doesn't simply choose to be an "investor" in real estate vs in the "trade or business" of real estate. It's based on the facts and circumstances.
I actually do choose to be an investor. I choose not to work as an employed real estate person.
Being in the trade or business of rental real estate generally does not subject the rental taxable income to SE taxes..
There are different types of rental income. Check your sources.
. Rental real estate is not subject to SE taxes unless (1) the taxpayer is a dealer and the property is used in the taxpayer's ordinary trade or business as a dealer, (2) the taxpayer is renting out farmland under very specific fact patterns, (3) hotel-like services are provided with the rental, or (3) the taxpayer is renting space in parking lots, warehouses, or storage units. This is pretty clear under IRC Sec 1402 and the related regs…
I recommended Lasser's Tax Guide. I was not trying to dissect a frog. People could wind up being a dealer and not even be aware of it.
The SCOTUS Groetzinger case has made clear that there is no set amount of hours to reach trade or business status (there is no "so many hours per week"). Yeah. Review your answer to question 1 above.
Yeah. I know. I figured Lasser's would help in that area.
The SS portion of SE taxes is 12.4% and the medicare portion of SE taxes is 2.9% for a total of 15.3%
I know. I know. But I think you MISSED THE POINT!!!!
Wow, this was a rather bizarre response to what I thought was a factually solid post by @Eamonn McElroy. Your original post makes it sound like one has a choice or can make an election as to whether or not they can call themselves a real estate professional vs an investor when that really isn't true. It's not something that one can just "choose". Believe me, if I had the chance to call myself a real estate professional this tax season, I would have been able to harvest a crapload of passive losses. But being an investor, I had no choice but to carry it forward into subsequent tax seasons.
SCOTUS Groetzinger may very well say there isn't a set limit on the number of hours that a gambler must gamble in order to be considered a professional gambler. However, the IRS is very clear on the determining factors for someone who considers themselves a real estate professional.
Pittsburgh, PA · Member since 2016 · 7 posts · 4 votes
7y
@Jonathan Greer
The whole process is a learning lesson. It’s great your taking the time to learn and understand the finance and tax implications of the business actions that you’re embarking on. Keep on learning and hustling and you will do just fine my friend!
Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
7y
@Karen Lee. I catch the jist of what you are saying and what they are saying. When you’re as small time as myself, and close to the boundaries you choose to fit the role or not by the difference of a few hours etc. thank you for both perspectives