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Author Topic: Tax ramifications  (Read 4595 times)

Offline MarleyLiv

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Tax ramifications
« on: July 21, 2004, 03:41:19 pm »
Hi all,

  Another question for the gurus of foreclosure investing...In general, how long do you like to hold properties for after you buy them and what are the tax consequences buying, fixing and selling in a short period and are there ways around that?  I recently read that the biggest drawback of "flippers" is the resale profits are taxed as ordinary income. However, if the property is held over 12 months, then it qualifies for the much lower long-term capital gains tax rate, currently a 15 percent maximum on federal income tax returns.  Please enlighten!  Thanks in advance!

Offline tedjr

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Re:Tax ramifications
« Reply #1 on: July 22, 2004, 06:50:28 am »
Howdy Marleyliv:

I remember hearing someone tell me that if you are considered a dealer by buying and selling that the long term hold of inventory in your regular line of business will still be taxed as ordinary income.

The best thing to do would be to use a different entity to hold your long term investment property and keep it separate from the flips and rehabs.
Ted P. Stokely Jr

San Antonio, Texas

Offline MarleyLiv

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Re:Tax ramifications
« Reply #2 on: July 23, 2004, 09:37:49 am »
hey tedjr,

  to let you know, your posts have been an invaluable source of info for me the past couple of months as i have been learning the game with a partner of mine in NJ.  

  can you please clearify what you mentioned about a different entity to hold the the investment property?  Do you mean forming an LLC or something like that?  My investment partner and I have been pondering what the best strategy would be starting out (without forming an LLC) and we decided on buying, fixing up a bit and reselling.  That is why I posted the question.  But we didn't want to go through the formation of a company in the beginning.  Thanks again!

 

Offline tedjr

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Re:Tax ramifications
« Reply #3 on: July 23, 2004, 12:08:22 pm »
Thanks for the praise but i am just repeating what I have learned from others.  To clarify you may want to form someting to hold properties, either a LLC or corp or just a partnership. The LLC tends to be the flavor of the day. I had a friend set up one on line with the Sec of State in abount 5 minutes for the total cost of $200. Be careful with record keeping etc as I believe there are some special rules there.

There are different schools of thought on when to form a company. Some say do before you even buy stamps to mail letters  with and some say  wait until you make some bucks  in the business and you decide to be in business full time. You too can always transfer property into a newly formed company without too much hastle.

Hope this helps make it clearer.
Ted P. Stokely Jr

San Antonio, Texas

Offline Bud Branstetter

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Re:Tax ramifications
« Reply #4 on: July 23, 2004, 11:20:16 pm »
The 12 months and 1 day for long term capital gains treatment is only for investment property.  That means rentals.  Short term capital gains is your current tax rate and may mean self-employment tax of 15.3% if you make most of your income that way.

What type of entity to form needs to be determined for your situation and approach or goals. No one answer for everyone.

Offline DerekDavis

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Re:Tax ramifications
« Reply #5 on: July 24, 2004, 02:32:23 pm »
I just formed an S-corp on the advice of an accountant.   In Texas, LLC's have to pay an additional 4.5% franchise tax on inventory (houses).  Apparently, with an S-corp you can avoid this....I'm relying on my accountant and hope this is true.

Offline Bud Branstetter

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Re:Tax ramifications
« Reply #6 on: July 24, 2004, 05:28:26 pm »
Derek,

I don't know if the S corp is right for you because I don't know your situation.  If you are a small time investor and keep houses then an S corp can pass profits through without self-employment or other taxes.  But then so can an LLC or a limited partnership.   Yes, there is a franchise tax but the big bite comes on sales not holding.  If you are doing a lot of rehab and retail sales many investors form multiple LLC's to avoid the tax when selling.  You might want to check with other advisors that know your situation.

 




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