Taxes & Capital Gains on Flips

We've been flipping houses since 2001, & yes it's true a short term investment is taxed...the rate in your case would most likely be "oridinary income", so what ever tax bracket your in for the that taxable year is what you will pay on only the profit made on the flip...Example : My CPA takes the HUD statement on the purchase(lets say we brought it for 48K); then I give him the expenses on the property(rehab costs,utilities, taxes, insurance - 6K); then he takes the HUD statement for the sale(lets say you sold it for 66K); So your taxable amount is 66K - 48K - 6K = 12K. Now lets say you're in a
30% tax bracket(depending on your income & deductions) That means $ 3600 goes to Uncle Sam, neting you $8400.
Now depending on what your income is working, that $ 8400 could be 2 or 3
months of income, that might have only taken 30 days to make...Not Too Shabby.
Also, keep in mind that if you set up a LLC or S Corp business, all your
expenses, such as gas, phone, vehicle payments/insurance, office exp., business lunches/dinners, etc. are also tax deductable...making your tax liability even less; even all they down to $ 0.00

like i said, to me a profit is a profit,
i make about 30k already without flipping, so if i were to make a 12k profit on the deal.

come tax time i would be in the 34-82k tax bracket correct? thus being taxed at 25% ?

now do i pay the taxes on the sale at the end of the year or when we close on the sale?

Thanks again

If you make 30K, plus the example of 12K = 42K...as far as your bracket
it just depends on your deductions(# of dependants, file long or short form etc.).You pay taxes on April 15th for the previous year. And you NEVER pay taxes early to the IRS, this way your money can work for you(remember, if you owed taxes the IRS would charge interest & late penalties, but when you have a refund due, the IRS does not pay you interest). ALWAYS consult a professional tax preparer, accountant or CPA.

Because you have deductions. If you have children, you have something like 8K removed from your income for each child. If you have a home and pay a mortgage, all the interest and property taxes are removed from your income. If you have business expenses not related to the flip, they are removed from your income. If you have a home office, the % of your home that is an office has write offs of EVERYTHING done to your primary home to the % the home is used for business. IE, a 10K kitchen remodel- 10% of your home is used as an office? 1K of write off due to the 10% use of your home for a business. This not only applies to improvements, but to utilities, insurance and it all adds up!

Basically, the more write offs you have, the better. Having multiple rentals has really been a blessing because I haven't had to pay taxes in many years due to all the write offs and depreciation. Though I have a small negative cash flow on 2 of them, it more than pays off with write offs and taxes.

When you in business & have all those deductions, as well as your personal ones like mortgage interest/property taxes etc. your tax liability can be extremely low. We had returns where we had a gross of $ 475,000 & still
had $ 0 tax liability.

Basically,

You pay taxes on what you make for the year,

So just calculate what you think you'll be taxed for by the end of the year, take that from your profit and put it aside and wait for uncle Sam?

Thanks everyone its great how in a couple of hours you can get your questions answered from others her in the DG Family.

When you do your flip, mark your mileage on your car! Every mile is a tax write off, so long as you document it all. When you go look at properties, write down your odometer reading at the start, each house you look at, and your odometer reading at each house. All of it counts towards a write off. Have a repair on the vehicle you use for business? Its a write off to the % of the business use you have of the car.

Bought Dean's books? Joined the Success Academy? Bought anything to help with your business? Its a write off.

Its not really all that simple to calculate because there are many laws so your best bet is a CPA. Although, if you have to do it yourself, turbo tax is pretty good, but you will have to do A LOT of reading with turbo tax. NOT FUN!

I've been self employed for two years so I'm accustomed to writing things off, do you think there will be any more of a tax since I'm self employed.

I usually go to H&R Block to get my taxes done.

also i hear if you do multiple flips you may be considered a dealer and may be subjected to another tax?

on how many flips you will be doing. If you hold on to a property for a year you avoid the 35% tax, but if you are viewed as an investor and not a 'dealer' then you won't have to worry. The best thing is to get a CPA and consult before you start. If you're going to roll over profits from one flip to another you can delay taxes with a 1031 exchange.

H&R will not be able to give you the advice you need; at least when I had them they couldn't. When I had 4 properties it was too complicated for H&R, that's when I got my CPA, and what a bunch of info he gave me! IT was amazing the tricks and ways to file in order to minimize your taxes.

Most important though is to keep records and receipts of EVERYTHING, no matter how small. If you're missing the receipts or proof, the IRS won't let you write it off! Hope this helps some.

It is CERTAIN you will succeed!

Wow this is quite educational. Very good stuff. I was aware of most of it but still I am glad I clicked on that post. I have been looking for input on tax preparation because I want to make sure I am doing things smartly from step one. I have been a little dissapointed to see no attention given to this subject within any of the instruction such as the books and course materials. I am wondering whether or not I should do an LLC, or just invest in my own name. I guess I should consult a very good accountant, (one used by investors), before beginning either way.

Sincerely
Steve

I live in Colorado, should I get a CPA that lives in CO or should I still use the one from when I lived in NH? I would assume to use one in CO since they would be more tuned to the state laws here.

thanks to Diane! If you do more than 3 deals in any one name; whether it be your own name, or your LLC, in any ONE year, you are labeled as a dealer. What does this mean? 3 VERY important things! 1. You are placed into a higher tax bracket. 2. DO NOT DO DEALS IN YOUR OWN NAME! Once labeled as a 'dealer' you will ALWAYS be a dealer to the IRS. 3. TRUSTS have one more VERY valuable benefit! (Hold each property in its own separate trust!)

All the houses we have purchased in the past 13 yrs have been in our personal name. We used a corp. to just purchase vacant lots here in Fl. The reason we don't purchase the houses in the corp. name is because the home owners insurance (which is already extremely high in Fl.) is even more expensive.
As for being a "dealer" & being placed in a high tax bracket; well we had enough substantial deductions to have a "0" to very low tax liability several
years.

I too have done the same thing, luckily I've never sold more than 3 in a year. I also have enough deductions from the rentals to have 0 liability. But, if someone doesn't hold rentals and focuses on only flips, they could be in a lot of trouble! I am transferring all my properties over to trusts anyhow, but this was an unknown benefit.

I got this info from Diane at the RESA. She's a big wealth of knowledge, just love talking to her!

I do not wholesale at this time but what about the income from wholeselling I do not see the write offs from that. Has anyone just been a wholeseller and how do you do on your taxes.

Steve.