I’m really beginning to believe that taxes are the one thing that real estate investors avoid talking about because the guru’s want people to buy their books or 10 DVD course but forget to tell you about the taxes; which make it hard to make a living “flipping properties.”
Capital gains tax is 15%, if you have to pay 15% everytime you do a rehab you’re pretty much at a loss. If you sell a $100,000 home, thats $15,000 to uncle sam, which would normally be the biggest chunk of your profit.
I’m posting to almost get people to come clean about the taxes and tell us some facts.
Taxes are part of doing business, any business. They are no heftier in real estate than most other occupations (imo). Depending upon your business structure and what you are doing with your real estate your tax rate may be 15% capital gains or a higher ordinary income level. The tax pros on the site will chime in. As for your example; remember you are taxed on your net profits, not the gross sale price.
You don’t need to buy any guru’s books or DVDs to learn about taxes. Just talk to your CPA. If you don’t have one, I would highly recommend finding a good one that knows real estate investing. But 71tr is right, you only pay taxes on your profits.
And the 15% you cite, would be for long-term capital gains – not short term. Depending on how you’re structured and how you’re reporting, short-term capital gains is typically treated as ordinary income, which is usually higher.
So, on a typical flip, it could be a lot more than 15%. But there’s always the 1031 exchange, if you want to use it.
I think the important thing to remember is, if you’re not making any money, you’re not paying any taxes.
I have a house thats been in my name for about 10 years now and if I go and renovate it and sell it for about $80,000 after putting about $35-40,000 into it what kind of tax would I have to pay. It has NOT been a primary residence. I’m going to use the profit to pay for college most likely. I expect to make around $38,000 profit.
Keep EVERY SINGLE receipt so that you can maximize/track the amount that you are putting into the property.
If you have had the property for 10 years, you can sell and pay the 15% capital gains on the profit or you can exchange it for other “like kind property” (e.g., other investment property) and defer the capital gains. Any cash that you take out during an exchange is referred to as “boot” and you will need to pay capital gains tax on it…
Actually, from what I understand, you are taxed on the PROFIT made - not the principal balance. Therefore, if you bought the $100,000 for $50,000, you’d only be taxed on the $50,000, or $7,500 - not the whole $100,000. Plus, as others have mentioned, you can take a lot of deductions due to the rehab work, too, that further limit the amount of taxes you have to pay.
i thought this was a general rule of thumb. i could have sworn i read people doing 1031’s with much less holding time (2 months or so)…maybe my memory deceives me ;/
I looked into this a little more, and this is what I came up with.
[i]When looking at “investment intent” the courts will often look to the period of time over which the property is held. That said, there is no specific holding period requirement for either the relinquished or replacement property.
Taxpayers who hold their relinquished property for two years satisfy the requisite intent for a 1031 Exchange (or two tax reporting periods, since in an audit the IRS may look backwards and forwards two tax returns). A holding period of over a year has generally been accepted, but may be subject to review by the IRS. A much shorter holding period has been accepted, where a change in circumstances indicates that the taxpayer had intended to hold the property for a longer period. The IRS will look at ‘investment intent’ and will call a taxpayer quickly flipping property a ‘dealer’ vs. an ‘investor’.[/i]
rehabs are not capital gain properties. they are ordinary income subject to the taxpayer’s marginal tax rates (28%?) plus self employment taxes. figure around 43% total of the NET.
note that this is a Sch C business, and therefore all your other legitimate business expenses can be deducted (cell phone, office supplies, new table saw, accountant) to arrive at NET income.
for properties that are held for investment (ie: rentals) the capital gain is generally the sales price minus adjusted basis (cost plus improvements). If you held it over a year it’s taxed at 15%, plus depreciation recapture.
taxes are a good problem: they mean you made money.
you are correct that there is no statutory limit the property much be held, but rather intent is important. However, it is a reasonably well accepted that >12 months can established that intent however, other factors can be involved such as whether you have other income sources, etc. Note, the tax treatment is subject to each property on an individual basis.
this is why you need a good tax professional (either an EA or in some cases a CPA).
in your case, having owned in 10 yrs, I highly doubt anybody would question the intent (assuming you have not used it as a princple residence) becuase most likely you were renting it out and you have SchE for previous years.
The poster stated that he has owned the subject property for 10 years and has not been his residence…hopefully, it has been generating some kind of income for the past 10 years…
this is why I dont “flip” maybe the occasional I would do but I buy right fix rent and refi to pull all my money out plus a profit and let the renter pay it off for me. Its tax free money after all write offs.
Exactly! dwj469 you get the cash you would have gotten from a flip and you still get positive cash flow every month. You figured out how to get the goose that lays golden eggs, without killing the goose.