Posted by Dave T on August 19, 2004 at 24:04:45:
Remember that the IRS still leaves some money in your pocktet after taxes. Nobody ever went broke taking a profit – even after taxes.
Tax Questions-1st deal - Posted by Todd
Posted by Todd on July 26, 2004 at 21:59:16:
I am about to close on my first deal and need some tax help before selling down the road. I am about to close on my first REO SFH deal for 50K. Bank will loan me up to 70K. Home appraised for 85K and I have a rent to own buyer that will purchase at the end of 12 months for 80K. My questions are if I take the total 70K loan will I be taxed for the extra 20K I cashed out of the loan after I sell the house to my rent to own buyer? I thought this would be considered borrowed money and not income and not subject to taxation but this is not a re-fi loan?
Lastly, my rent-to-own buyer has the option to buy anytime during the 12 month period. If he can receive financing and cash me out before 12 months, would I be considered a real estate dealer and subject to the s/emp tax? I am a novice investor so any advice would be appreciated. Thanks.
Re: Tax Questions-1st deal - Posted by Dave T
Posted by Dave T on August 16, 2004 at 24:39:11:
Todd,
Your taxable profit on the deal appears to be $30K (bought for $50K, sold for $80K). The amount of your mortgage balance is irrelevant here. Just consider that your $70K mortgage loan gives you $20K of your profit in advance of your sale and the money is already in your pocket.
I am tax conservative on the question of dealer status. I would say yes, your sale of this property is a dealer disposition. Consider that the short term capital gains tax rate and your ordinary income tax rate are the same anyway, so a sale in one year or less gets the same tax rate regardless of your “status”.
The major difference between a dealer disposition and the sale of investment property held one year or less, is the profit from the dealer disposition is also subject to self-employment income taxes (the social security and medicare taxes that you have withheld from your paycheck). Additionally, you can not use installment sale tax treatment nor a 1031 exchange to defer your taxes.
Re: Tax Questions-1st deal - Posted by Todd
Posted by Todd on August 17, 2004 at 20:26:30:
Thanks for your prior response, Dave T. Another quick question. How do I arrange the sale of my investment property without incurring the s/e tax? Is there some type of legal loophole around this. I have read books on flipping properties and I am sure most investors get around the “dealer disposition” tag and avoid the s/employment taxes.
I really would like to flip a property or two to build up some cash reserves before becoming a landlord, but if I will be forced to pay higher taxes through the s/e tax, I may have to re-consider. Thanks again.
Re: Tax Questions-1st deal - Posted by Todd
Posted by Todd on August 17, 2004 at 20:19:39:
Dave,
How could I arrange the sale of the investment property within one year where it would not be classified as a dealer disposition and subject to self employment taxes? I have read all kinds of investment books on flipping properties quickly and want to know how they avoid the s/e tax issue? I am interested in holding some properties long-term in the future but I want to cash out a couple properties first to payoff some outstanding debts and increase my cash reserves.
But if there is no way around paying extra taxes such as the s/e tax, I might as well hold every property for a minimum of one year.
Thanks for your prior response.
Re: Tax Questions-1st deal - Posted by Dave T
Posted by Dave T on August 19, 2004 at 24:03:07:
If you are an honest and above board sole proprietor, then you report your flipping profits on Schedule C and compute your self-employment income taxes on Schedule SE.
You can use an S-Corp instead of a sole proprietorship to reduce your self-employment income taxes somewhat, but I know no legitimate loophole to avoid the SE tax if you are flipping properties.
Some claim that you can use your self-directed IRA to defer the tax bite, but I believe you just bring unrelated business income taxes into the picture because you are conducting an active income business from within your IRA. Perhaps an IRA expert will tell us that I am wrong, but until proven wrong I would expect the IRS to take the worst case view.