Investor · Raleigh, NC · Member since 2013 · 348 posts · 128 votes
13y
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!
Investor · New York City, NY · Member since 2013 · 1k+ posts · 269 votes
13y
Of course I am not a CPA and you should seek professional tax advice but I would assume any type of short-term gain is normal income.
If you are receiving that income an entity you should be able to deduct any normal business expenses from that gain to reduce your tax liability.
Serious flippers should always create an entity for their business to take advantage tax deductions, ability to get funding from private lenders, and overall risk liability.
I hope that helps and best of luck in all your endeavors.
Rental Property Investor · Louisville, KY · Member since 2008 · 342 posts · 123 votes
13y
Right now I don't have a LLC for rehab properties yet, I have not done any rehabs yet but I have some rental units. If it works out well enough for me I will get a LLC going or should I just start one for reselling anyways for my first property?
Mainly I am just trying to get an idea what to expect as far as total % goes for taxes so I can factor it into my numbers to see how the numbers work.
What I was planning on doing is using a separate LLC for reselling properties and another LLC for long term holds.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
13y
Again not a CPA here but I'll tag Steven Hamilton II and he will chime in shortly I'm sure.
Your profits on flips will be taxed as normal earned income, not capital gains I believe. Flipping is considered a business and the homes are considered inventory not an investment, so you will be taxed as self employed and owe the self employment tax.
Rental Property Investor · Louisville, KY · Member since 2008 · 342 posts · 123 votes
13y
I found this on the IRS site. So if my income from job is over $106,800 and I sold a rehab for $20k profit does that mean I don't need to pay the 12.4% just the 2.9% for Medicare on anything over the $106,800?
I'm having an aneurism thinking about paying 47.3% in taxes, 34.9% still hurts but is much better.
IRS Site
For self-employment income earned in 2013, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).For both 2010 and 2011, the first $106,800 of your combined wages, tips, and net earnings are subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement (tier 1) tax. Income you make after $106,800 will not be subject to the Social Security tax.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
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.
Investor · Raleigh, NC · Member since 2013 · 348 posts · 128 votes
13y
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!
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
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).
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.
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?
Investor · Raleigh, NC · Member since 2013 · 348 posts · 128 votes
13y
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.
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.
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!
@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.