For Example
If I tied up a property for $100,000 and then found an end-buyer willing to pay $120,000.
Now with doing a double closing, I make a $20,000 profit, my question is do I have to pay capital tax gain on the profit?
And if so is there any way around paying the tax?
Thanks in advance.
You pay income and employment taxes on the profit (45%). You can reduce the tax by maximizing deductions.
BLL is correct, let me add two points:
The tax is at your bracket, not necessarily 30%; and
Using an S-Corporation or Limited Partnership (or a C-Corporation in very special circumstances) can eliminate the @ 15% social security/self-employment tax. Also, you may not be in a 15% bracket for SS/SE tax purposes, particularly if you have a high wage, you may only be on the hook for 3%.
#2 applies only if you are taking a salary form the LLC/partnership.
I agree. You need to take a “reasonable” salary and it subject to SS/SE tax, so the object is to keep the salary as low as arguably possible and pass as much through as distributions, which are free of SS/SE tax.
Hello, i’m new to the board. Great discussion! Hopefully, my question is on topic (or related). Last year, i worked for a RE investment co., as an independent contractor; property locating (bird-dogging). To file taxes for this income as a sole proprietor, what business category should i use; Real estate, other? And how to describe the service and customer?
a) property locator for real estate investment company
b) consulting to real estate investment company
c) other idea?
Your comments and ideas would be greatly appreciated!
Doesn’t matter too much, as long is the income itself is correctly reported. I’d either do property, other or some misc. services category…probably the latter, as the IRS is auditing things involved with RE at a higher rate than was customary.
Depends on the amount you are paid. If you have W-2 income and the birddogging income is sporadic income, then I would report the income as miscellaneous income on my 1040 with no further explanation. As miscellaneous income you don’t get to take any business expense deductions.
If you report it as income received to your “company” then you should probably report the income and your business expenses on Schedule C, but then you also have self-employment income taxes to deal with too.
Right or wrong, I handled it as miscellaneous income when I was a 1099 employee for two months back in 1991 when I was between jobs during a career change.
Thank you for the responses! I see your point with mics inc vs Sch C. Would be simplier, just starting off with only around 10k inc. But, with my husband’s W-2 inc., i had hope to show a loss from my expenses. It appears self-employment tax doesn’t appy to a loss.
Regarding ‘other or some mics service category’ would admin & support service or pro., scientific & technical serv do? They seem, only other Sch C categories that apply. Then i have to describe activity and service. Market research serv? Advertising? Business development?
This year i’ll have more income and hire a pro. Figuring out all these details; stressful…
then I would report the income as miscellaneous income on my 1040 with no further explanation.
last time I tried this with box 7 “non employee compensation” IRS flagged it. their computer expects to see box 7 income on Sch C.
The solution is to put the income on Sch C, include an “expense” of the same amount that says “to 1040 line 21” and then include the income on line 21.
This avoids SE, but gets the income on (and off) the Sch C where they expect to find it.