How do i pay taxes on profits on flips?

[Nirzhar Kar]

I am going to invest on my first flip with a small group of 3 other investors (family/friends). I am wondering how i deal with tax ? Say i make 50k in profits. Do i pay the tax on the 50k and then distribute everyones weighted profit portion or do i distribute everyones profit and then pay tax on my own porition?

Also is starting a LLC a good idea?

[Jay DeCima]

Nirzhar

Let me suggest that you pause a moment.

I like all kinds of real estate and have invested in most of them over my 50 years in this great real estate investing business.

Though I have done many flips, I learned after awhile that, for me, they did not lead to my financial success.

What I quickly learned:

• There are few tax benefits with flips
• You pay the highest rate of taxes (pretty much like a W-2 wage earner)
• Surprise..........you pay Social Security like you were a business
• (I found this the hard way). Your calculated profit figures of what you should get at the close of escrow are not the same as what you take home.  "Investment profit evaporation."
• If you are trying to make a living doing this you need to identify your next property almost before you close on the current one.  Too much work.

When I changed to buy and hold of Colony houses, my bank account grew quickly.  Colony houses are groups of older houses, duplex, conversions, etc. on a single parcel in older parts of towns (not war zones).  

At my "high water mark" I had 200+ monthly rental checks coming in from my Northern California rentals.

I also learned:

• By fixing up units when I bought them, I FORCED UP APPRECIATION that was not taxable today.
• In addition to forced appreciation, I enjoyed the market appreciation over the years.
• Tenants, that I never knew previous to renting to them, were paying my mortgages and ALL MY BILLS and my lifestyle.
• In later years, I sold by carrying the financing and collecting monthly checks from the buyer.  I call this Pajama Money.  I could pick up these checks on the first of each month by going out to my mail box in my PAJAMAS.
• Depreciation when you have many rentals is very good for keeping you taxes down.
• Many other tax benefits.....car, computer, tools, milage, software, etc.

Good luck.  Personal message me if I can be of help.

Take care.

Fixer Jay DeCima