Can anyone fill me in on how property is taxed if you did a double/simultaneous closing? Do you pay capital gains tax? Any way around it? How do you maximize your profit when doing these deals?
JD
Yes, you pay capital gains tax on your profit. The one way you can reduce or eliminate is by using a self-directed IRA, but you won’t be able to touch that profit until you retire without penalty.
I’m not a tax expert but I believe the transaction will be taxed as ordinary income and not at the lower capital gains tax rates. Oh, and don’t forget after paying withholding taxes on the deal you will also have to pay self employment taxes…another 15%.
I am a tax expert and a double closing means you did not intend to hold the property as an investment, thus it is not capital. this makes it ordinary income, subject to income tax at your marginal rate plus self employment taxes. estimated tax bite ~45%.
So what do investors do to avoid paying taxes on this income. Do they buy more property at the end of the year and hold on to it till taxes are done and sell the property. Could you use the money to buy more real estate and keep it from being taxed…such as a 1031 tax exchange? ( I am not familiar with those so if I am mistaken please excuse).
1031 doesn’t apply in the case of short term holds where you are quickly flipping it.
Love2invest,
The answer is buying with self directed IRA’s, doing 1031 Exchanges, etc. Also…you should have a lot of writeoffs (expenses) to offset your earnings. Those expenses will help ease the pain a bit. Mileage, office expenses, travel, depreciation of assets, etc.
Nate-WI
Quick profits are an excellent problem. Expecially in this current market, try to accumlate some rental properties for .65 cents on the dollar. As you build your inventory you’ll have some nice depreciation to offset some of those fast gains. Keep doing it.
one strategy to avoid taxes is to avoid making income. Increasing expenses usually means using up cash. I’d rather have the $1 and pay 45 cents in tax than pay out the $1 to “save” the 45 cents. either way you keep the same amount of cash.
taxes are a “good” problem to have.
I understand everyone’s desire to avoid sending any more money to the gubmint than necessary, but flips are simply the highest taxed form of real estate investment.
Personally, I love rehabs. But I expect to pay the 45% tax bite.
FYI, I agree with Mark here. And I’m a tax CPA…