If I buy a reo for 10,000 and sell if for 25,000 what will I have to pay uncle sam if its only been mine for a month? Do I pay taxes on 25, or 15,000? I am confused as this is my first year investing?
You are taxed on your profit, $15K in your example. What you will pay is determined by your income tax bracket.
Dave is right, but there’s more to it…
If you buy a REO at $10K, here’s how it can roll-out…
$10K purchase
$25K sale
=$15K GROSS Profit
MINUS
ALL COSTS associate with the purchase, administration and sale of the property (i.e. - financing, lawyer, realtor, accountant, car expenses, title search/insurance, inspections, etc…)
Now, once you minus all that it will leave your NET Profit, which is what is taxed as Capital Gains at your tax level, taking into consideration your regular income AND Net Profit income. This assumes you are not going to roll 100% of the NET Profit from the deal into another property, which you can do with a 1031 Exchange. This defers your tax liability until yo actually realize the NET Profit from a future sale. There are rules regarding this, but also tax advantages that go beyond this and you should schedule time with a tax accountant who specializes in Real Estate (you can find them by visiting your local REI Club).
This site gives a straightforward explanation, including examples, of the the 1031 Exchange…
http://www.sbohexchange.com/P23.cfm
If you don’t have an accountant, MOST will meet with you for free for an initial consultation, but even if they charge you $100, it would be well worth it to put yourself on solid ground on this issue, as they will know the what, when and how of where you live…
Some will even set you up with Quickbooks to make filing easier…
Hope it helps…
What Dave T said is right. You take the $15,000 and take out your tax rate for example 25% ($3750) and both halves of social security 7.65% +7.65 or 15.3% ($2295). So you are taxed a total of $6045.
You should consult your tax professional because there should be something you can do to reduce that total $15,000 from being your actual exposure and you need to know what your rate is.
Property you are flipping is not eligible to participate in a 1031 exchange. Consult your tax advisor for specific details.
to elaborate a little more.
for most folks, taxes on flips are ~45% of NET BUSINESS INCOME.
Net business income is sales minus:
the cost of the property
repairs/improvements to the property
selling expenses (commission, etc)
other business expenses such as:
cell phone
business mileage to/from the jobsite, home depot, etc. (keep a log)
office expense
business meals
utilities
insurance
tools
neighbor kid you hire to rake leaves
advertising
pest control
any other expenses related to the BUSINESS.
When you get to NET income, it’ll be taxed 15.3% for SE tax plus whatever your marginal tax rate is. Give or take some because half the SE is deductible, meals are limited to 50%, fudge some here, squish some there gets to approx 45% for most folks as a good rule of thumb.
Mark, so in a situation where you buy a property for $10K and sold it for $25K but had the following deductions, am I correct in saying the taxable amount would be $3,000?
Rehab/Replacement of trim, paint, appliances, doors, tile, carpeting, wood, windows: $8730
Commission to sell: $1500
Business Meals at 50%: $300
Tools: $800
Insurance: $200
Business Mileage: 50.5 cents x 500 miles = $252.50
Utilities $147.50
Cell Phone: $70
yep
I also have a question, is the profit add on top of what already make from 9-5 job, if so, someone who flip several houses a year could pay tax at 28% bracket, right?
Your bracket is the tax rate at which the next dollar of taxable income is earned. If the next dollar you earn from a flip puts you in the 35% tax bracket, then the ordinary income tax rate on the net profit from that flip will be 35% in addition to the self-employment income tax.
How do you know what bracket your in and how much youll get taxed.
Say im a Student in College, no job, no income or anything, and i wholesale a property. do i get taxed? and how will they no