as I understand it, if I buy a home and sell w/in 2 years then I’m liable for capital gains tax correct? That is about 40%?
My question is this: What if I go out and get my residential builders license and act as my own contractor when I’m rehabbing houses or “flipping” them, would I still be liable for the same capital gains tax or is it now classified as revenue for the business and taxed at my net income rate?
another similar ? would be the same situation…If I’m a builder and I build a spec home do I pay capital gains tax when it sells?
My understanding:
Capitol gains are paid on the sale of investments(stocks, bonds, RE, etc). In the US, if you hold an investment for 1 year and one day you pay your applicable capitol gains rate, usually 15%, when you sell. If you hold for less than 1 year and 1 day, you still pay capitol gains tax but at your normal income tax rate.
If you start a business explicitly to flip houses, then the houses are not investments and you pay at your normal income rate, plus self employment tax.
If you start a real estate investment business and flip investment houses you will pay capitol gains on your flips unless you are classified as a “dealer” by the IRS. If you are classified a “dealer” you pay at your normal income tax rate, plus self employment tax.
If you sell a property that has been your
Builder spec house…I don’t know
jmd_forest
flips and rehabs are always ordinary income, subject to income and SE tax.
rentals are property held for investment and are capital transactions.
a builder’s spec house is “inventory” and sale of inventory is ordinary business income - same as with flips.
that sounds about right. I guess what I’m getting at is it makes sense to me to get my contractors license/residential builders license and start and llc construction company then I can avoid paying cap. gains on my flips…or at least that’s what I’m thinking.
I’m in SC and it’s not that difficult to get your builders license. I’ve seen the material and most of it is pretty basic stuff. cost is 99.00 + test prep, so it can be done for less then 500.00 and you’ll have a much better understanding of what you’re actually doing when rehabbing, not to mention being able to work better w/ subs and buy materials at a wholesale price.
Assuming that you’re going to pay taxes of some sort, you don’t want to avoid the capital gains tax compared to ordinary income tax because it’s the lower of the two.
Capital gains taxes are about 15%, while ordinary income taxes are about 40%.
I thought it was just the opposite?
I thought cap gains was 40%…so I’m incorrect on this
People often refer to the “high” short-term capital gains tax, but short-term (<12 months) capital gains are taxed as ordinary income. That is the rate that is so high.
Long-term capital gains (>12 months) are treated more favorably.