How to deal with taxes from income procured from wholesaling
Hello,
I am a new-comer to investing. I plan on wholesaling at first to build up my capital while at the same time growing my network and learning all I can about the business. While my plan isn't to remain a wholesaler, I want my main focus to be on long term buy and hold multi-family properties. The "analysis paralysis" is starting to set in as I listen to podcasts (BP and others), read books on real estate and personal finance. Many questions have been brought to my attention from all the information that I have been gaining. So ill just start with one question per post and go from there. My question is, how do you navigate the income taxes incurred from wholesaling. Meaning how do I avoid owing a large amount to the IRS at the end of the year. Thanks for the help.
Hmm.. you really don't.. That's why wholesaling and flipping aren't always number 1 on investor's bucket list. They are the most tax inefficient method since their profits are considered active, ordinary income subject to self employment tax as well. If you are really "making it," you could try to form a legal entity, such as a LLC, and elect to be taxed as S-Corp. That will just let you avoid paying SE tax on some of the income. But, you also have the expense of maintaining that S Corp. It really doesn't save necessarily that much.
I know people will say to deduct "stuff." If they are entirely attributable to wholesaling, that means you actually spent the money. So, it will save taxes but you also don't have it for profit...
To save on tax payments, another method would be put it into a tax advantaged account such as a self-employed 401k account. the limit on that is some ~$57k annually I think. The calc gets a little more complicated to get there, but I think aroudn $250k income you end up maxing out. Of course, now the funds are in a 401k type account that you can't easily access. .... unless you turn it into a self-directed account --- it just gets more complicated..
Sorry I don't have any better ideas. Good luck.
Quote from @David M.:
Hmm.. you really don't.. That's why wholesaling and flipping aren't always number 1 on investor's bucket list. They are the most tax inefficient method since their profits are considered active, ordinary income subject to self employment tax as well. If you are really "making it," you could try to form a legal entity, such as a LLC, and elect to be taxed as S-Corp. That will just let you avoid paying SE tax on some of the income. But, you also have the expense of maintaining that S Corp. It really doesn't save necessarily that much.
I know people will say to deduct "stuff." If they are entirely attributable to wholesaling, that means you actually spent the money. So, it will save taxes but you also don't have it for profit...
To save on tax payments, another method would be put it into a tax advantaged account such as a self-employed 401k account. the limit on that is some ~$57k annually I think. The calc gets a little more complicated to get there, but I think aroudn $250k income you end up maxing out. Of course, now the funds are in a 401k type account that you can't easily access. .... unless you turn it into a self-directed account --- it just gets more complicated..
Sorry I don't have any better ideas. Good luck.
Good stuff here. Thanks for sharing David and good luck Benjamin!
So, basically what your saying is that I should keep a percentage of the income in an account, so that it can be paid at tax time?
Pretty much... You know what they say about "death and taxes..." Consult your accountant/CPA, but you are probably going to need to set aside ~40% away for taxes... Or, just send it to the IRS --- i.e. don't forget about est tax payments...
The only way to avoid paying taxes to IRS is to make no money. That obviously isn’t a great strategy. The more money you make the more taxes you pay. As noted above, set some proceeds aside for “tax time” if needed