I’m trying to do a deal where the owner hasn’t lived in the property for two years, just a little bit over a year and he doesn’t want to do any kind of cash back at closing or a seller concession because he believes he’ll have to pay capital gains tax on that concession. The listing broker also said that an accountant did tell him that he’d have to pay and it sounds to me like it’s time for him to get another accountant.
Am I missing something here? I thought it would just get deducted as an expense and it’s going to right there in the HUD and on the purchase and sale agreement. I think the only drawback for the seller is that he has to pay the stamp tax in this state which is only $4.56 per thousand.
A seller concession reduces the sale profit and also the amount subject to taxes.
If the seller is concerned about the tax on the concession, then lower the contract price by the amount of the concession. That should remove the seller’s concern.
The listing broker needs to quit taking tax advice from his accountant – let the accountant do bookkeeping, let tax professionals give tax advice.
phatman5,
For this seller, the federal income tax rate on his sale profit will be 15% – the maximum long term capital gains tax rate on a capital asset.
Well the problem is that my buyer wants to do 100% financing and if we do cash back at closing or seller concession, then we have to inflate the sale price by the amount he is getting back. With that in mind, there’s no way to lower the contract price without removing the seller concession.
It’s not the listing broker’s accountant, it’s the seller’s accountant. Sorry for the confusion there. Sounds like it’s the seller that needs to get a new accountant.
Yeah, I thought it was pretty straightforward, profits are what’s left over after expenses and this one would be an expense that shows up on a HUD. I’ve done these before, but it was always owner occuppied for more than two years so it was never an issue. This time the guy has only lived there for about 17 months so he’s got to pay taxes. Worse is that he bought the place for $1 from his family and they bought it 20-30 years ago so he’s going to owe a lot in taxes.
I should probably figure out a way to defer the sales til September, then he wouldn’t get hit with taxes, but then I can’t figure out how I’m supposed to get paid before then. And of course I don’t represent the seller so it’s not really my problem.
If you have the resources to do this deal yourself, buy from the seller at the price the contract would be with no seller concession. Then turn around and sell to your buyer at the higher price with a seller concession.
I am guessing that your seller is not going to budge on the tax issue, even though we both know that the seller is getting bad information. Your only recourse may be to find another buyer.
Interesting theory, but I don’t think it will work that way. My buyer can barely afford the asking price as is, once I buy it, he certainly won’t be able to afford it. Anyway, I did check an IRS publication and it looks pretty straightforward that it’s a deductible expense. Don’t know where his accountant is coming from.
The maximum is your income tax rate rate if you’ve held it for less than a year.
In this case the owner lived in the property and didn’t rent it out, but he’s selling the property before the two year mark. If it’s held for more than a year, but lived in for less than two years, I believe the maximum long term capital gains tax is 15%.
If you’re a short time flipper, you may also have to pay self employment taxes as the property could be treated as inventory in a business and your profits would be subject to your income tax on the federal and also state income tax if your state has it.
Flipping makes for great TV, but the reality is that people don’t make as much as they think. I remember one show where they thought they had a shot at making 150k on a flip, but due to various reasons, they only ended up clearing 20k when the show came back a year later. Plus they put lots of time and energy into it, that 20k probably would have been the same as just taking a second job.
The maximum federal income tax on a property you flip or rehab-flip is your ordinary income tax rate plus 15.3% self-employment income tax. Does not matter how long you held the property.
In the original post, the seller’s primary residence is for sale. He has owned it over one year but less than two. The maximum capital gain tax rate on that seller’s primary residence is 15%. A primary residence is not flip property.
Interesting point. Do you mean to say that because it is considered inventory, it doesn’t matter whether it’s held one year which is normally short term capital gains or long term which is in the 15% tax range?
So I suppose the thing to do is to rent it out for a few months and then it’s considered an investment property and then you can use the long term capital gains tax rate of 15%? And then that would eliminate your 15.3% self employment tax?
No, the thing to do is to rent it out for a year or more to establish investment use as the primary intent behind the acquisition. Too quick a sale allows the IRS to infer that your PRIMARY intent was to flip the property all along, and, you are just using a short rental to disguise your intent.
Because flip property is considered inventory, capital gains tax rates do not apply. Ordinary income tax rates do apply and in certain circumstances self-employment income taxes also apply.
The holding period for inventory does not affect the income tax rate applied to the profit when the inventory is sold.