Ok., I have a fairly new LLC, to use for flipping and was wondering if you all could help me out. Just trying to figure out what my tax situation would be on properties I only have for a short time? Say 3-6 months. Do I have to pay the 15.3% self imployment taxes too on top of the 28% capital gains?
I truly appreciate any info you all can provide me.
Thanks
DM
flips are not capital gain transactions. they are ordinary income taxed at marginal rates. SE applies.
Thanks mcwagner,
So, as I gain profits from flips/wholesale deals, and deposit that money into my biz account, it is not taxed until it gets paid to my personal account, at my personal tax rate. Is this correct, because if it is, I feel alot better about it than I did. I was figuring 43% oooucha.
Thanks again
You should consult your own CPA, but SE might not apply if you are able to classify your flip as investment income.
The IRS makes a distinction between an investor and a “dealer;” an investor doesn’t pay SE but a dealer does.
Here’s a short article on the topic at LegalWiz:
http://www.legalwiz.com/freearticles/dealer.shtml
Kbird,
This might sound silly, But what is SE?
Self employment tax.
I just ran into this article on the topic – it has a little more detail and explanation on the dealer issue:
http://www.creonline.com/articles/art-246.html
if you buy a house with the intent to resell (as opposed to holding and renting) you are a dealer on that property. It is treated as if you were in the business of selling houses and the house is your inventory. The gain is treated as ordinary income, subject to marginal taxes plus SE.
There is no way to “classify” this as an investment; the rules are clear. If the intent was to resell, you dealt the property.
It will taxed in the year sold, regardless of what account the funds are being held in. If you personally own the properties, 43% is about right.
factor in deductions as well.
with the right business structure, careful planning and sound implementation of a business plan - the advantages become very apparent.
mc, isn’t there some rules to be classified a “dealer” and what are the tax implications?
isn’t this why many investors use several business entities? i mean, there’s no rules dictating a limit on how many businesses one can be involved in/invest in?
if an entity purchases a property with intent to resell, the entity is a dealer. since income retains its character when it passes through to the taxable party, it makes no difference. choice of entity has no effect on whether a property is dealt.
now, if you operate a C-corp or LLC taxed as C-corp, you can avoid the SE portion. but then you have to deal with the other C-corp hassles.
yes, I already explained the rules defining “dealer”. it boils down to intent. did you advertise the property for rent? did you have tenants in this property last year? or did you buy it, fix it, and put it on the market to sell?
dealing is determined on a property by property basis. If 99% of your properties are dealt, it will be harder to claim that you intended to “hold” this one for investment - You’re a dealer. Conversely, if you have several rentals and just decided that this one didn’t fit your portfolio, it will be easier to claim that you are not a dealer and did not deal this property. this is the reason for multiple entities: it makes the claim more credible. unless, that is, you end up with a property in the “wrong” entity… which is the problem with this technique. You can’t always accurately predict in the beginning what the best exit strategy will be for every property. And there is no problem with dealing and investing in the same entity, as long as good records are kept that indicate intent.
if you buy a house with the intent to resell (as opposed to holding and renting) you are a dealer on that property. It is treated as if you were in the business of selling houses and the house is your inventory. The gain is treated as ordinary income, subject to marginal taxes plus SE.
My wife and I have rentals, and we did a rehab/flip in 06. This is how we will report and pay our taxes. 43% on the flip.
marc,
would be a dumb question but -
the 43% you and your wife are paying - that’s your tax bracket plus 15% SE?
so it’s so 28% + 15%?
also - business deductions…they more or less work like this:
revenues = 600,000
expenses = 500,000
profits = 100,000
deductions = (say 39%) = 61,000 - and this represents taxable income…
or am i way off with the deductions thing?
of course you can take other legitimate business deductions. mileage to the job site, insurance, office exp, cell phone, everything applicable to the business.
but business net income will be taxed at marginal rates plus 15%.
the 15% you pay if you’re a dealer…
hey you’re approaching 1000 posts - cool!
15% SE if you dealt that property.
yeah, I need to get a job…
revenues = 600,000expenses = 500,000
profits = 100,000
deductions = (say 39%) = 61,000 - and this represents taxable income…
TMCG,
Forgve me for a dumb question.
What deductions are you talking about that are not already included in your expenses?
Dave,
business deductions are not the same as expenses, per se.
the irs has rules for businesses. follow the rules and you’ll make out. many don’t follow the rules because they don’t know the rules.
i’m no expert either, but i know that the irs looks at TWO main things:
intent
is it reasonable?
is it reasonable to say that your cell phone is used for business, even though it’s your personal phone?
YES.
was the intent for business? - say you take the maximum deduction for your cell phone usage - the answer is YES, if you use your cell phone for business, that’s intent.
computer - do you use your computer for business? this is business to me. typing here in this forum is business. i have it documented in my business plan that i type on these forums to contact other investors for information and to offer some advertising of our websites - ssooooo, the intent is there for my business AND
yes it’s absolutely reasonable that i would use my computer for business purposes - sooooo - my computer is both personal and business - thus, even though there’s no direct expense from my business (because i bought the comp with personal money) - the comp is being used by business - so i take the maximum deduction i can for the use of my computer -
YOU CPA SHOULD BE TENDING TO THESE DEDUCTIONS. if he/she is not - fire them and get a new CPA.
the only thing you must remember is not to try and make your hobby a business deduction. irs will see through this and give you problems for claiming business deductions for hobbies.
posting on these forums could easily be considered a hobby - BUT, since i run two websites, have it documented in my corporate books, have a business plan with this activity sited, and log my hours online - this is definitely not A HOBBY. it’s WORK for my business.
now, without a website, who cares - do you use Excel? quickbooks? do you post on here to connect with other investors, lenders, realtors etc? - do you log it?
THAT’S BUSINESS DEDUCTION TERRITORY ALL THE WAY!
how do you have a deduction for your personal/business computer that was purchased personally? just add it on the tax return? this is comingling.
the LLC shouldn’t deduct it if the LLC didn’t pay for it, either outright or via expense reimbursement.
because i have intent - to use the cell phone for business related matters.
and two
it is certainly reasonable that i use it for business, as long as i document it.
i’m basically paying for a business expense with my own money -
BUT THE BUSINES IS NOT PAYING FOR PERSONAL ITEMS AND BILLS - like all my gas and leisure travel and my mortgage and the landscaper who cuts MY yard, etc…
that’s comingling.
as long as i can show intent and if that intent is reasonable - i can claim the deduction. right???
the LLC cannot deduct it if the LLC didn’t pay for it.
either purchase by the LLC or submit an expense report (mileage, etc).
gotcha!