All Forum Posts by: Michael Plaks

@Cory E.

A technical, but important, correction: the very term capital gains does not apply to flips. Flips have ordinary business income, which has very different rules from capital gains and is taxed much higher.

@Naga Mullangi

No, it cannot. 1031 exchange is only for investment properties, which pretty much means rentals. Flips cannot be used in a 1031 exchange.

@Cory E.

If it really was a flip, i.e. property bought, fixed and resold - you would have been taxed much harsher: regular income tax + self-employment tax. This can amount to as high as 40%, but in any case more than 15%. I recommend my clients to set aside 1/3 of the profits from each flip for taxes.

@Richard Decoste

No, Richard, they are not, with the exception of points for loan origination.

@Larry Flanagan

What you want to get, Larry, is impossible. Not because of QuickBooks, but because of general principles of REI bookkeeping. Recording a rental property for tax purposes never matches the cash in/out flow. You either use QB to record cash, and then it becomes useless for taxes - or, like most investors, you record transactions for tax purposes, but you will not see a true in/out cash. It will require manual recalculation, sorry. Your job is a little easier since the property has been sold, but it still requires some manual number crunching.

gave you an excellent tip on using "class" feature of QB. It will not completely solve your problem, but it will make it so much easier. Besides, you need to use classes anyway - one class per property plus a general class.

@Cory E.

From what I understand, intentions aside, it did end up being your personal property. It apparently was never used for any business purposes. So, for your 1/3 share, no capital gains. For the other two guys, they will have long-term capital gain on their respective 1/3 of profit. The tax rate is 15%, and possibly less or even zero, depending on their overall income.

@Dan R.

I'll risk arguing with my colleague, even though he is the moderator :)

If you want to stay safe with the IRS, then yes, both your accountant and Steven are correct. The IRS does not recognize managing rental properties reported on Schedule E as a business. Consequently, they do not allow any business overhead deductions, including cost of health insurance. If you put it on Line 29 (you would have to force your software to do so), it will be flagged by the IRS computer and very likely result in an audit.

However, if you're really aggressive and don't fear a fight with the IRS, the law may actually be on your side, provided you have big enough portfolio. There have been court case precedents where the IRS was forced to treat significant rental (Schedule E) activities as "trade or business", and business overhead expenses were allowed. But if you go this route, you better be ready for an audit and a fight.

One other important consideration: the business has to be profitable to allow for the health insurance deduction. Most Schedules E for mortgaged properties show tax losses, not profits. If so, the deduction will not work for you anyway.

Lastly, you can restructure your business to allow for a "clean" health insurance deduction, via creating a separate property management business, but this is on the advanced side, not for a quick online tip.

You will pay income tax plus self-employment tax. Together, they addup to anywhere between 15% and 40%, depending on your overall tax situation. I recommend my clients to set aside 1/3. Keep in mind that the tax is on the net profit of your entire business, not just one deal. It's your $40k profit minus all business expenses: marketing, driving, education, etc.

@Ronald Holloway

Ronald, you may have missed the point that Jon was correctly making: your only capital gain is increase in property value since the time you inherited it in 2010. How much did it increase since then? Probably not too much, besides it will be offset with selling costs such as Relator commissions etc. So you may not even have capital gain taxes. And if you do, there's no need to wait until next year. You will have long-term capital gains even if you sell today.

Pamela, 1031 exchange is for exchange of investment properties, which generally means rental properties. It does not work for flips.