I just got a house under contract thanks to the great tips on here. I put and or assigns after my naME AS BUYER. I got it under contract for 25000, I now have a buyer to assigfn it to for 49,900. Will that be on the settlement sheet somewhere for seller to see and does it matter how much I assign it for? I usually see 5-10,000. Will I have to pay taxes on 25,000 assignment fee or not? I hate to have it in my name for a few weeks and sell and have 25,000 capital gains so wanted to assign for quick profcit if its legal. ???
Help!!! Anyone know these answers??? :help
It’s quite simple - if you make a profit, it’s taxable - and at the normal income rate for your income bracket.
Keith
Is that the same rate as capital gains tax???
If I understand the tax code correctly you will not pay capital gains if you never actually take possession of the property. That is why you would count it as income.
Flip income is ordinary income subject to income and employment taxes. The homes are considered more like inventory than investments.
Capital gains do not apply to flips. They only apply to investments.
I dont know what the rate for ordinary income is but I hate to make 25,000 to give lotssss to irs. Is there a legal way around this that would save me on doing flips or is this the way it is? Thanks so much for your responses!!!
Yes, there is a legal way to not pay taxes on all the money you make. They’re called tax deducutions and you should make sure you make the most of them to offset the taxes on your income.
One example of ordinary income is the money you make at your job. The tax rate for ordinary income ranges from 10% to 36%, but for 95% of Americans, their ordinary income tax rate is 25% or less.
You also have to consider that flipping property is a business and the income you earn from your business is self-employment income. This means that in addition to the income taxes you also have to pay social security and medicare taxes on your income. These extra taxes add another 15.3% to your ordinary income tax rate. So, if you are already in the 25% tax bracket, the federal tax hit on your $25K flip profit will be around 40%. And that is just for the federal taxes. Your state also gets a share. If your state has a personal income tax, then just plan to give about 50% of your flipping profits to the government when you file your tax returns.
this isn’t really a flip. You never owned inventory.
You’ll just show $25k as Sch C revenue.
From this you can deduct your expenses for earning this income: mileage to/from the home, mileage looking for deals, advertising, dinner with the buyer, business cards, yard signs, donuts for the open house, cell phone, fax line, postage, etc.
revenue minus expenses = income
income x 45% = ~ tax bite.
Mark,
Does not matter that cwb never went on title. He had a contract interest in a property and is proposing to sell his contract interest to another investor. His “inventory” in this instance is his contract, and his contract assignment is still a dealer activity. Still flipping in the broad context of the term.
Just how I see it.
cwb,
Since there is quite a bit of profit on this deal for you – nearly 100% – many investors would prefer to conceal their profit from the end buyer and accomplish the flip in two separate closings, one with the seller and another with the end buyer. That way the end buyer does not really see how much money you are making.
If you assign your contract to another investor, you are assigning the contract you have with the seller at the $25K purchase price. I don’t quite see how your buyer won’t feel ripped off if your assignment fee is as much as the purchase price for the property.
With an assignment fee that large, you risk having the buyer walk from your deal and perhaps try to negotiate directly with the seller for a much lower purchase price.
If you do go through with an assignment, you probably should expect to forfeit some of the potential profit you see in the deal and accept an assignment fee in the $4K to $6K range. This will put your buyer into the property for around $30K.
If you have the means to close on the property with your seller, then resell the property in a separate closing and keep most of the $20K equity spread for yourself.
Dave,
you call it inventory in one paragraph, and an “assignment fee” in the next. I see it as assignment fee income, which could be earned any number of ways that don’t involve flipping. The key here for me is: if the property doesn’t sell, he no longer has an asset. No asset = no inventory in my opinion. But it seems we’re disagreeing over something that is irrelevant one way or the other.
:beer
either way, he ends up with 20k net, which is then reduced by other business expenses.
The key here is to make sure you pick up all your other business expenses.
Mark,
All I am trying to say is that property flipping can be accomplished in more than one way.
Imagine you are a stock trader. You buy and sell stocks all day long. You decide to lower your capital investment and improve the yield on your investment by using derivatives – stock options. You control the same underlying asset with a stock option. Even though you are not buying and selling the stock, you are still a trader if you buy and sell the option to buy (or sell) the stock all day long.
Same with the real estate. You don’t need to actually buy or sell the real property to be a flipper. You can buy and sell the real estate contracts. You are still a flpper. The mechanism for selling your contract is an assignment and the profit you make on the sale is your assignment fee.
As I see it, you are still engaged in a flipping activity. Your stock in trade is the contract you assign (sell) to your buyer. The contract has intrinsic value and can be bought and sold as easily as the underlying asset it controls.
If you put up any earnest money with the seller to obtain your contract, then fail to close on the deal, you forfeit your earnest money. The forfeited earnest money is a capital loss, so why wouldn’t the contract be an asset?
If you don’t accept my argument, I will agree that we disagree