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Message
Taxes on a House Flip
Posted on 3/5/18 at 1:07 pm
Posted on 3/5/18 at 1:07 pm
A buddy of mine and I flipped our first house last year and did fairly well on it. I knew taxes would be high but not 40% of the profit.
Is there something I'm missing? Are there ways around not having to pay 40% of profits on every flip?
We flipped the house through an LLC we formed last year. We plan to do more just hoping to find a way to reinvest most of the profits rather then send almost half to the IRS.
Thanks for any help!
Is there something I'm missing? Are there ways around not having to pay 40% of profits on every flip?
We flipped the house through an LLC we formed last year. We plan to do more just hoping to find a way to reinvest most of the profits rather then send almost half to the IRS.
Thanks for any help!
3
Posted on 3/5/18 at 1:17 pm to ONTIMELSU13
I’m not aware of any way to defer taxes on flips. If it was a buy and hold you could look into doing a 1031 exchange.
Posted on 3/5/18 at 1:22 pm to ONTIMELSU13
Take less profit.
Take advantage of deducting all your business expenses.
Take advantage of deducting all your business expenses.
Posted on 3/5/18 at 2:09 pm to ONTIMELSU13
Heres the thing, you are engaging in this to make a profit. You have an llc set up for this purpose. So this is very much a business.
Sadly, you will need to pay your normal rate on this income, just the way it is. As mentioned above, just make sure to deduct every dollar you spent on this place to minimize the gain. But beyond that, you got to pay taxes just like any other business.
Sadly, you will need to pay your normal rate on this income, just the way it is. As mentioned above, just make sure to deduct every dollar you spent on this place to minimize the gain. But beyond that, you got to pay taxes just like any other business.
Posted on 3/5/18 at 2:17 pm to OceanMan
Thanks OceanMan... Totally agree just making sure I'm not missing something.
Appreciate the feedback!
Appreciate the feedback!
Posted on 3/5/18 at 4:07 pm to ONTIMELSU13
40% ????
Seriously, are you legit rich? Not OT rich?
Seriously, are you legit rich? Not OT rich?
Posted on 3/5/18 at 4:28 pm to ONTIMELSU13
What you may be “missing” is that you probably invested time that we’re unpaid for. So obviously you couldn’t take a deduction.
Of course, your return is higher as a result, but maybe after factoring in time you feel your overall return was not what you expected.
I hope I’m not coming off as condescending at all. Just trying to help with perspective. 40% is a high rate, but I just assumed that was your all in (state and fed) ordinary rate.
I’m not exactly sure of your situation but the one thing that might help you out in the future is holding for over a year, and you will likely get cap gains treatment. So if you are ever close to a year, it could pay to wait for a reduced rate. I would recommend talking to a CPA about this though, as there are a ton of variables.
Of course, your return is higher as a result, but maybe after factoring in time you feel your overall return was not what you expected.
I hope I’m not coming off as condescending at all. Just trying to help with perspective. 40% is a high rate, but I just assumed that was your all in (state and fed) ordinary rate.
I’m not exactly sure of your situation but the one thing that might help you out in the future is holding for over a year, and you will likely get cap gains treatment. So if you are ever close to a year, it could pay to wait for a reduced rate. I would recommend talking to a CPA about this though, as there are a ton of variables.
Posted on 3/5/18 at 4:52 pm to OceanMan
quote:
I’m not exactly sure of your situation but the one thing that might help you out in the future is holding for over a year, and you will likely get cap gains treatment. So if you are ever close to a year, it could pay to wait for a reduced rate. I would recommend talking to a CPA about this though, as there are a ton of variables.
I'm dealing with a similar issue with a client right now. Obviously I can't get into particulars, but the client flips 2-3 houses per year. He has no intention of keeping them as rental props etc... he wants to get in and out in 3-4 months.
If you are in the business of flipping houses, then it should be business (ordinary) income, regardless of how long you hold your, for lack of a better term, inventory.
To me, this is no different than a builder who builds a house on spec, then it takes a year and a half to sell. It's still ordinary income.
Posted on 3/5/18 at 5:31 pm to LSUFanHouston
quote:
If you are in the business of flipping houses, then it should be business (ordinary) income, regardless of how long you hold your, for lack of a better term, inventory.
This is why I omitted this part from my original post. It most likely won’t apply, as that is what they are in business to do. It really depends on the nature of the operation, and how many flips they do.
Your point is spot on though, if that is what you are in business to do, there really is no preferred tax treatment unfortunately.
Posted on 3/5/18 at 6:51 pm to OceanMan
Forgive me, i’m seriously curious how you had to pay 40% of your profit in taxes.
Posted on 3/5/18 at 7:39 pm to AUjim
quote:
Forgive me, i’m seriously curious how you had to pay 40% of your profit in taxes.
Tax rate plus 15.3% fica/ self employment tax.
Posted on 3/5/18 at 11:56 pm to LSUFanHouston
LSUfan - if a builder can't sell the spec house for 18 months, doesn't that qualify for the long term rate?
Posted on 3/6/18 at 2:12 am to matthew25
1) Investor versus Dealer-Trader
The tax treatment of flipped houses is partly determined by whether the IRS categorizes the seller as a real estate investor or a dealer-trader, who flips houses as a full-time business. There is no hard rule for differentiating between occasional flippers and flipping pros. However, if you frequently buy and sell homes, are a real estate broker, own multiple properties at the same time or derive most of your income from flipping, the IRS is likely to consider you a dealer-trader and tax your profits accordingly.
LINK
The tax treatment of flipped houses is partly determined by whether the IRS categorizes the seller as a real estate investor or a dealer-trader, who flips houses as a full-time business. There is no hard rule for differentiating between occasional flippers and flipping pros. However, if you frequently buy and sell homes, are a real estate broker, own multiple properties at the same time or derive most of your income from flipping, the IRS is likely to consider you a dealer-trader and tax your profits accordingly.
LINK
Posted on 3/6/18 at 10:10 am to AUjim
quote:
Tax rate plus 15.3% fica/ self employment tax.
This.
Thanks again everybody for feedback... Hoping to do more flips this year and will try and find as many deductions as possible I guess
Posted on 3/6/18 at 11:17 am to baldona
quote:
Tax rate plus 15.3% fica/ self employment tax
Would OP and his partner each taking a smaller salary and then allowing a larger portion of the profits to be distributed to them via K-1 help in this situation?
Posted on 3/6/18 at 3:37 pm to Tiger Prawn
As of the first house neither of us took a salary at all.
We both got a K-1 splitting the final profit 50-50. That money is being taxed to each of us as personal income even though we both left all of it in the LLC's bank account.
We both got a K-1 splitting the final profit 50-50. That money is being taxed to each of us as personal income even though we both left all of it in the LLC's bank account.
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