Taxes and Wholesaling

18 Replies

Hello,

New to the BP forum. My wife and I are just getting into the real estate investing world and are trying to figure out what niche we should really focus on.

My wife is a real estate agent and I have worked in construction for quite some time now, so it makes sense to us to be a flip team. But we are interested in owning rentals as well, and possibly getting into wholesaling.

Could anyone give me some info about capital gains tax and any taxes involved with wholesaling? Our understanding with capital gains is that unless you occupy a home for two out of five years you will be taxed a pretty high percentage of what you have earned, so if this is true it seems wholesaling wouldn't be worth the hassle unless you found a killer deal.

If anyone has any insight on how taxes relate to wholesale, it would be much appreciated.

Thanks!

I'd think it'd be treated as inventory and not an investment.  The idea if you're wholesaling is NOT to own the property.

So prob ordinary income.  Have your wife check with the state REA, she may not be able to do wholesales.

Wholesaling is taxed at ordinary tax rates, also subject to self employment tax. You can also benefit from the up to 20% Qualified Business Income deduction, which helps take some of the sting away from ordinary tax rates.

Capital gains treatment is normally for properties where at least the intention is a buy and hold. Wholesaling is very clearly not this - it is more akin to you buying and selling widgets, or providing a service, than it is to the stereotypical capital gain - buying and selling in the stock market. There are very clear cut definitions provided in the code and regulation on each of these, but the simple examples above are a good way to think of it.


Originally posted by @Drew Beard :

Hello,

New to the BP forum. My wife and I are just getting into the real estate investing world and are trying to figure out what niche we should really focus on.

My wife is a real estate agent and I have worked in construction for quite some time now, so it makes sense to us to be a flip team. But we are interested in owning rentals as well, and possibly getting into wholesaling.

Could anyone give me some info about capital gains tax and any taxes involved with wholesaling? Our understanding with capital gains is that unless you occupy a home for two out of five years you will be taxed a pretty high percentage of what you have earned, so if this is true it seems wholesaling wouldn’t be worth the hassle unless you found a killer deal.

If anyone has any insight on how taxes relate to wholesale, it would be much appreciated.

Thanks!

The 2 out of 5 years is for the Primary residence. Not your flip property. 

Yes, factoring in tax reduces your returns. I am glad you are thinking about it’s.  I know flippers are happy with 10k profit but they don’t realize that they could very well pay almost 50% on taxes.



Originally posted by @Drew Beard :

@Ashish Acharya

Ashish,

If I get a private lender to purchase a home and my sole purpose is to flip the home, do I get taxed a percentage depending on how much I netted from the home, or is a flat percentage? I’m not following how this differs from capital gains?

You basically created a partnership with the private lender if the lender is coming in as a partner, not just a lender. 

Then when you sell the property, you divide the profit based on your agreed-upon terms. Yours profit is reported in your tax return as Ordinary income. The income is taxed as ordinary income just like your W-2 income. There’s no flat tax. Ordinary income tax rate goes up to 37%.

Capital gain tax goes up to 20%.

On top of the ordinary income you will also pay self-employment income tax or 15.3. 


Not to be rude or anything but looks like you are missing the basic tax knowledge. And it’s not your fault.  Not everyone needs to know the details about the tax law. Maybe talk to a tax professional to clarify some questions? 

I think you are worrying what color Ferrari to buy when you have not won the Lottery yet.

FIND some deals and make some money first. So what if you pay 22% or 30% or even 35%. If you are buying properties right, you are going to make tons of money. The trick is to buy the properties at the right price from the right people. This probably does NOT mean buying them on the MLS. You have to market to people who are distressed to get the great deals.

Get in a habit of making money from the properties that you buy and THEN start to worry about the tax implications. You are going to be so worried about the pennies that the dollars are going to go right past you!!! Focus on finding GREAT DEALS.

@Rick Pozos

Rick,

In regards to finding good deals. Have you found a strategy that works best? My plan as of right now is to set up a website that is focused on sellers in my home town of population 30k. Also trying to send out mailers to owners of homes I am interested in. Do you think I should focus on homes in my are until I a good a grasp on investing or should I broaden my search?

@Ashish Acharya

I am very uneducated when it comes to tax. I am trying to gain more knowledge. Hence, the post. I posted this question to make sure that I am figuring in all the different costs in buying my next home, and so I know exactly which route I want to go with my next purchase. I understand rehab costs from my prior construction knowledge, and I have a pretty good understanding of regular maintenance costs. But the tax knowledge is pretty foggy. But I will take your advice and speak with my CPA and pick is Brain.

Thanks man!

First of all, there is no Best, fastest, most efficient way to do anything. Do what works for you. I send out postcards to people behind on taxes and I have lists of people who are in some sort of distress. I also network with lots of other people to partner on deals with them. I have 3 Facebook pages, a website, a blog and I talk with everyone that I can about real estate. I help people in the area with questions that they have about real estate. You kinda have to make it your life.

YES, work on your town. Get a few deals done where you make some money. As you feel comfortable move into a bigger area. 

@Quintin Stauber how would you do it?? Use your imagination and you will probably figure out several ways.

Think about it for a minute. Who might be distressed? or Soon to be distressed??

Maybe a friend of yours who just got laid off?? Maybe a friend who just got divorced?? Maybe some friends who are always saying that they never have any money?? Maybe a friend who just inherited a house??

NOW go to the deed records, county clerk, appraisal district or whoever you have to and get their information. There is everything that you need.

NOW it takes lots of work on your part to make it happen. Look at my last post about Facebook and website, helping people also.

You don't have any information on your profile so I don't know where you are, but where are foreclosures posted?? There is no magic list. YOU go find the information. Make some phone calls to the county, city or whoever takes care of that issue.

Who collects taxes where you are?? If you really don't know where people pay taxes, google it. Make a phone call and ask some questions. Don't get off the phone until they have answered all your questions.

@Drew Beard Everything seems to be pretty well covered here. But I will add that if your girlfriend is an agent, make sure that she checks with her broker to see if wholesaling is something she can even do. I know here in CA there are a number of brokers who do not allow their agents to be wholesalers and find the process to be immoral. I am not here to pass judgement (I honestly see both good and bad in wholesaling), but I figured it might be useful to put out there so neither of you (especially your girlfriend) get in trouble without even knowing! 

But from what I can tell on here, wholesaling is a great way to build smaller amounts of money for your own investment down the road. Any positive gain in real estate for a newbie investor such as yourself sounds like a win to me! So if you are making any money right now, I would consider it successful for you. Besides, while you may be making money on the deal, your experience in obtaining leads and making deals happen is far more valuable than the dollars you'll make on the deal and can help you for the rest of your investing career. Maybe consider this a simple stop on the road to financial freedom!

Good luck to you. 

Originally posted by @Drew Beard :

@Kory Reynolds

Kory,

Thanks for the information. You mentioned that there is a clear cut definition in the code and regulations. Do you know where I can I find these codes and regulations for my state?

The definition of a capital asset is determined at the federal level, not state by state. Most states don't have different tax rates for capital gains anyways.

In any case, Internal Revenue Code 1221 defines capital assets, and it's supporting regulations provide you with more details.