Buy, Fix, Sell, Rehab Tax Burden Question, Rates?

Question

Hello,

Just wanted to ask this to make sure I understand the tax ramifications correctly before venturing into a buy, fix, sell property.

If I owned the property and sold it in under a year, lets say 6 months would it be considered Short term capital gains tax?

If my tax bracket is 28% and state is 4% does that mean I would owe 32% on all profit or do I have to pay self employment taxes also?

I am just trying to get an idea of what my total tax burden will be on the profits of a short term fix and sell deal. Thanks.

Jacob A. · Answer

Aren't we forgetting the fact that half of the SE tax is also taken as an above the line deduction on the first page of your 1040.  I like to focus on the positives!

Steven Hamilton II · Answer

@Michael J,

Your LLC can be taxed as an S-corp.  I do recommend it for flipping; however, depending on your tax bracket and income, you may be better off with a C-corp.  S-corps have distributions not dividends. What they pass through is subject to ordinary income tax as opposed to dividends taxed at the capital gains rate.

One thing to consider is what @Toby Johnston said about using the profits to contribute to a retirement account. As a sole proprietor you can contribute a 20% profit share after making up to 17,500 in elective deferrals. If above age 50, you can make applicable catch up contributions.

A Corporation changes this to 25% profit share; however, you are limited by your wages paid to yourself and/or your spouse.

Michael,  you have to type @Michael J and click on the name at the bottom of the text edit box.

Michael J. · Answer

Ok got it thanks.

How do you link to someone's name, I received a email. Apparently just using the @ symbol doesn't do it.

@Toby Johnston,
I would like to do that at some point to defer taxes some.

Jacob A. · Answer

Michael J. I was just making the point that yes you will have to pay a 15.3% SE tax, but you do get a little bit of savings by being able to deduct a portion of it on line 27 of your 1040.  So this will be a direct reduciton of your taxable income.  If you pull up a copy of a 2012 1040 form, and look at line 27 you can see what I'm talking about.  You can also pull up a schedule SE if you want to see how it's calculated.  Any decent tax software should calculate this for you.

Michael J. · Answer

Thanks for the info. Any tips on what can be done other than legally deduct every single possibly thing I can? Is there much of a difference if I do my first property under my name vs a LLC or S-Corp?

Would a S-Corp be better compared to a LLC for reselling since some of the money could be taken as a dividend instead of income?

@Jacob Allen

Can you expound on what you wrote? Thanks!

Steven Hamilton II · Answer

Mike Neubauer,

I agree; however, if they are doing their own work not as much of a salary is going to be coming.

-Steven

Steven Hamilton II · Answer

Jacob Allen,

That is fine and dandy; however, you are still paying that percentage, so you get a deduction of 7500 at the 25% bracket(1,875 savings); when you still have to pay  15,000. (just using round numbers).

Mike Neubauer · Answer

And, if set up as an S-corp, you can take a reasonable salary and only pay the SE tax on that amount with the rest passing through... correct?

Steven Hamilton II · Answer

Hello Michael J.,

Your profits on the flip will be taxed as ordinary income plus subject to 15.3% in SE Tax ( Both employee and Employer halves of Social Security and Medicare).

So depending upon what your personal salary is it could be a significant tax burden if not done correctly.

Yes you only pay full SE Tax on up to 106,800 in income; however, the medicare tax is unlimited.

thanks @Matt Devincenzo   for the tag.

Buy, Fix, Sell, Rehab Tax Burden Question, Rates?

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