Fix and flip tax help!

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OP

Member since 2019 · 25 posts · 9 votes

3y

Quote from @Ashish Acharya:

Please see below:

this is only 1 flip so would I just be taxed as short term gains of 15%? If not,am I taxed as regular income ? - yes,ordinay income I believe 24% tax bracket, plus NYS 6.25% (or would it be indiana ) plus a 15.3% self employment tax? Seems very high! - I know but that is roughly correct. If that's the case how can I minimize this? I have seen that opening a self directed IRA would help slightly - SDIRA will probably not help.

Depending on your other self-employment/W2 income, your tax advisor needs to do the tax-benefit analysis of S-corp. Make sure you consider, retirement accounts, home office, hiring your kids, writing off auto, and things like that.

Thanks so much for the response. So realistically I’m better off holding it and renting it for a year then doing a 1031

Mike Klarman

Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes

3y

Taxes on short term gains in RE is usually 40%. If you hold it for one year, I think it drops to 25%, and if you live in it for two years then sell it I think it drops even further.

But if you intend to just do quick flips and truck along then they will tax you 40% on your gross profit from the sale.

For my clients, they bite the bullet because we make it up in volume. I try to get my guys in and out of flips in 3 months and sometimes guys do two at a time. So if you do 10 in a year and net 30k after taxes on avg then your netting 300k. 5 in a year and net 150k. It's a good way to raise capital for your investments plus gain that experience lenders like. If you are doing a one off flip then yes, try and pay the least you can, but if you are looking to do 8 - 10 in a year I'd say just bite the bullet and pay the short term gain taxes and make it up in the volume.

OP

Member since 2019 · 25 posts · 9 votes

3y

Quote from @Mike Klarman:

Taxes on short term gains in RE is usually 40%. If you hold it for one year, I think it drops to 25%, and if you live in it for two years then sell it I think it drops even further.

But if you intend to just do quick flips and truck along then they will tax you 40% on your gross profit from the sale.

For my clients, they bite the bullet because we make it up in volume. I try to get my guys in and out of flips in 3 months and sometimes guys do two at a time. So if you do 10 in a year and net 30k after taxes on avg then your netting 300k. 5 in a year and net 150k. It's a good way to raise capital for your investments plus gain that experience lenders like. If you are doing a one off flip then yes, try and pay the least you can, but if you are looking to do 8 - 10 in a year I'd say just bite the bullet and pay the short term gain taxes and make it up in the volume.

Okay thanks for the info. Are you saying 40% of GROSS? I would assume in my case that I sold for 195k, they would just tax me on profit of 45k correct? After all expenses closing etc. taxing me 40% on 195k would probably put me in the red.. makes no sense

Mike Klarman

Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes

3y

On the gross profit. So 40% of the 45k. So 18k tax and net profit for you of 27k.

Now as a stand alone its ok. 27k is 27k but if you can scale that to 10x/yr then that's 270k, that's quit your job money. That's what I try to do for my guys. Set them up in good markets with a solid network that can turnover projects in 90 days close to close on flips. I create an environment where they can step in and do 6 - 8 no problem. On the last deal the client exited with 75k gross. He's taking the tax hit and walking with 45k. Financing closed late July on his purchase and he's closing Oct 10th on the sale. He's already in another deal with the same kind of numbers, loan closes in two weeks. He'll net 40k - 60k there again in 90 days.

OP

Member since 2019 · 25 posts · 9 votes

3y

Quote from @Mike Klarman:

On the gross profit. So 40% of the 45k. So 18k tax and net profit for you of 27k.

Now as a stand alone its ok. 27k is 27k but if you can scale that to 10x/yr then that's 270k, that's quit your job money. That's what I try to do for my guys. Set them up in good markets with a solid network that can turnover projects in 90 days close to close on flips. I create an environment where they can step in and do 6 - 8 no problem. On the last deal the client exited with 75k gross. He's taking the tax hit and walking with 45k. Financing closed late July on his purchase and he's closing Oct 10th on the sale. He's already in another deal with the same kind of numbers, loan closes in two weeks. He'll net 40k - 60k there again in 90 days.

Ok great. Can you shoot me a message? Would love to connect

Ahad AliPro Member

CPA/Investor · Bronx, NY · Member since 2018 · 236 posts · 45 votes

3y

As an SMLLC, you may claim a home office deduction and other miscellaneous expenses. Since you are located in NY and LLC is formed in Indiana, you need to pay Indiana state taxes as well. It's better to contact a local CPA firm that specializes in real estate. Flipping properties can still be eligible for 1031 exchanges under certain conditions. The IRS has strict rules that taxpayers need to follow to defer taxes. Again, book a meeting with a CPA who has experience with 1031 exchanges and real estate.

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

3y

@Michael Bieler, Yep the tax even on one flip is a killer! You'll have to run a comparison between the cost of carry (PM) vs the tax you'll pay. But you could also get a renter in there and do a refi. The additional rent income might help with your income needed for loan qualifying.

If you can make the hold numbers work then a "slow flip" (although I discourage folks from ever using the "F") word, would be your ticket.

Put a renter in, refinance the property to get your next acquisition, and wait for a year to do a 1031 on this one. During that time you're making income. from cash flow, amortization of the loan, depreciation benefit, and appreciation. And you're busy with your next acquisition anyway because you did the refi. Once you get this daisy chain going you'll be busy as a beaver making tax deferred income the rest of your life.

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OP

Member since 2019 · 25 posts · 9 votes

3y

Quote from @Dave Foster:

@Michael Bieler, Yep the tax even on one flip is a killer! You'll have to run a comparison between the cost of carry (PM) vs the tax you'll pay. But you could also get a renter in there and do a refi. The additional rent income might help with your income needed for loan qualifying.

If you can make the hold numbers work then a "slow flip" (although I discourage folks from ever using the "F") word, would be your ticket.

Put a renter in, refinance the property to get your next acquisition, and wait for a year to do a 1031 on this one. During that time you're making income. from cash flow, amortization of the loan, depreciation benefit, and appreciation. And you're busy with your next acquisition anyway because you did the refi. Once you get this daisy chain going you'll be busy as a beaver making tax deferred income the rest of your life.

Thanks for the input. I was thinking of throwing a renter in, I don’t think it will actually cash flow. Maybe break even monthly. I’m in a good flip area, but not so much for a brrrr. Tough choice to make lol

1 Reply

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

3y

@Michael Bieler, Break even still gives you amortization paid by the tenant, depreciation and appreciation + the 30-40% tax savings on the profit. It's just a very "meh" feeling to not see cash in the bank each month isn't it.

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Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

3y

You may want to see if you incurred other costs to lower your gain.

Property taxes, utilities, home office, driving to and from the property, travel to Indiana, LLC filing fees, etc

Best to consult a CPA

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OP

Member since 2019 · 25 posts · 9 votes

3y

Quote from @Dave Foster:

@Michael Bieler, Break even still gives you amortization paid by the tenant, depreciation and appreciation + the 30-40% tax savings on the profit. It's just a very "meh" feeling to not see cash in the bank each month isn't it.

Yeah you’re right. I have a tough decision to make!