All Forum Posts by: Paul Allen

@Caleb Landry you've asked a simple question, but the answer is not so simple!

BRRRR income is from rents, and is therefore passive income. It is not subject to self-employment taxes. Additionally, renting is a passive activity, so the losses are limited.

Flipping is active income. It is subject to self-employment taxes.

Money earned from (and expenses associated with) flipping will likely be reported on Schedule C unless you are in a partnership or choose to be taxed as a corporation - an entirely different discussion.

Rents (and rental expenses) are reported on Schedule E. 

Both Schedule C and Schedule E flow to your 1040. 

Income earned from flipping will still be income for the purpose of calculating self-employment taxes, but if you spend it on the rental property it becomes a rental expense and will reduce your rental income. 

Hopefully that made some sense!

The IRS will share information with state and local taxing authorities. Here in Virginia it takes the Commonwealth about 30 days to contact a taxpayer with a Virginia adjustment after the IRS adjusts someone's tax return. Some of the local municipalities here will contact a taxpayer with a letter essentially stating you filed a Schedule C, but you don't have a business license - explain this to us.

I don't know that California does the same, but the opportunity is there for them.

Best of Luck with Your Real Estate Investments!

@Justin Petrides you haven't lost your mind, but the law to which (I think) you are referring changed more than a decade ago. Currently, you can exclude up to $250K of capital gains on a primary residence if you own it and live in it for 2 of the 5 years prior to the sale. ($500K if you're married and filing jointly.) It's tax law, so there are numerous exceptions, restrictions, and extensions on that "section 121 exclusion", but that's the general concept.)

Since the property was gifted to you, you have the the gifter's basis in the property. You'll need to know what that is to determine your taxable gain. Many people refer to 'inheriting' as 'a gift', but the IRS does not. These are treated very differently in our tax code. If you inherited the property your tax situation would change (often dramatically).

BP is growing - yay! 

One of the side-effects of this is new members often ask questions that are the same as topics that have already been discussed in great detail. A common repeat question in this forum is "Where should I keep the cash I am saving for my first RE purchase?"

 If we had an FAQ post 'stickied' at the top of the forum containing links to threads covering commonly asked questions, the newcomers could get the answers they are seeking much more readily. The admins/moderators could set it up and then lock it to preserve the content.

My $0.02

From the limited information you provided:

1. You need to pay capital gains tax on the difference between the sale price and your basis regardless of whether or not you invest it in something else. 

2. If you are using the property for personal use it does not qualify for a 1031 exchange. (You called it 'my home' so I am assuming it is your residence.)

3. You can use your money however you like, but it will still be taxable.

Highly recommend sitting down with a tax professional and figuring out your exact situation. You may have options for reducing your taxes that aren't apparent from your post. New RE investors frequently try to save a couple hundred bucks by 'doing it themselves', and it ends up costing them thousands in taxes that could have been avoided.

Best of Luck with Your Real Estate Investments!

Interest income is always taxed at regular income tax rates. 

Always.

Unless it is interest from state and municipal bonds, which are not taxed by the federal government.

Or interest from EE bonds used for education.

Or... OK, so there's a few exceptions, but none of them are based on the length of time you hold the instrument.

Best of Luck on your Investing!  

The One-Page Financial Plan by Carl Richards

Bogleheads.org

Parents signing over a deed on a house to their children is one of the largest and most frequently regretted mistakes I see people make. It's sad, because the parents mean it as a grand and generous gesture, but it can cost the recipient tens of thousands in taxes that could have easily been avoided.

I hope you have spoken to a tax professional about the specifics of your situation to make sure you know the tax consequences of this action.

Welcome to BP @Encsi Balla !

Can you be more specific with your question?  Imagine this: A year from now you are really happy because you found the perfect financial advisor for you. What is it s/he helped you to accomplish that has you so happy?

Michael Plaks makes 2 great points here:

1.  I've also seen tax professionals (including CPA firms) bungle suspended passive losses.

2. A client recently brought me her self-prepared Schedule E for review and I didn't find an error on it. First time this has ever happened. 

@Jim Walters describes my (one-and-done) personal experience with a CPA firm. Not all CPAs are like the CPAs on BP, so choose wisely, or at least better than I did! (But it did facilitate a nice career change for me!)

@Mark Richardson The tax pros on BP are all 'online capable'. Tax pros not on BP - not as much. The IRS imposes stringent standards on digital information security, and not all tax pros are willing to deal with them. (Ironic given the number of security breaches at the IRS, but that's another story.)