Build and sell do you have to pay social security tax?

Question

This is my first project. If I build a house, pre-sell it when almost done, then actually sell it when done, do I have to pay social security taxes on the profit? I know as a short term gain I would have to pay income tax, which is fine, but I am worried I would have to pay social security taxes as well? I am already employed full-time and paying SS tax on that income too.

Thanks!

Carl Fischer · Answer

@David C.

Consider renting for a while at least a year and then sell. Turn it into long term capital gains and pay no SSI on the rent or sale and turn it into long term capital gains. Consider carrying costs, tax savings, cost of money, and use a CPA to help and see if it is worth it.

As@Nicholas Aiola questioned your intentions, carefully think about your answer and weigh the consequences.

Dave Foster · Answer

@David C. OR....Why wait? Move in now. Sell your current house and take the 121 exemption tax free. Then use the proceeds and pay off the current house and build another one. In two years sell the current tax free and where ya gonna move??? - into the new one you just built. As long as your family is willing to move periodically you can keep that tax free income coming in forever.

Amber Porter · Answer

And if you are intending to rent and eventually have to sell it when rents are good enough, you open the opportunity to do a 1031 exchange.

David C. · Answer

Ok thanks! I think I will stick to my original plan and rent it out long-term. Maybe move in after a few years. Thanks for the help.

Nicholas Aiola · Answer

@David C. intent is very important and it sounds like your plan is to rent it out. In that case, it will likely be considered a rental property, assuming you draft a lease, advertise the property, consider tenants, etc.

When selling a rental property, you are not subject to self-employment tax, even if it's sold within a year (short-term capital gain). This is not ideal, however, and makes it a little harder to substantiate the fact that it was intended to be a rental property, but it's not impossible.

Chris Youssi · Answer

Even if the you have an S corp and have to take a salary, it can be minimal which is easily justified when you already have a primary source of income. This will eliminate any burdensome FICA payments aka SSI. The other piece of information not mentioned if you have an S corp and take a salary is you are responsible for both your employer ( which is the s corp ) and your self which currently amounts to 15% out of every 100 you earn - very very costly.

David C. · Answer

I am about to start building the house. My original intent when I bought the land (and is still my intent now) is to build the house and rent it out for a long time. However, in the event that I don't receive the rent I hope for, it could be possible that I sell the house instead and use the cash to build another rental property vs paying to borrow that equity (my income is going to be the limiting factor on the HELOC, which is the preferred option). Thanks.

@Nicholas Aiola

Nicholas Aiola · Answer

@Ashish Acharya thanks for the shout out.

@David C. Whay was your intent when purchasing the land and building the property? Was it always to flip the house, or was it to live in the house/rent it out?

As Ashish mentioned, an S Corp could alleviate some of the tax burden.

Ashish Acharya · Answer

@Nicholas Aiola

Earlier post wont link, here you go.

Ashish Acharya · Answer

@David C. ,

Do you have a S-corp for this development activity?

If you have an S-corp, you dont pay Self-Employment Tax, but you have to pay yourself a salary, and with salary, you have to pay FICA taxes like normal W-2 wages.

If you dont have an S-corp, you have to pay SE tax on your profit on top of the income tax. Depending on your numbers, it might be beneficial to sell the house via S-corp if you have not already.

It might be a good time to talk to a CPA.

@Nicholas Aiola is based in NY, Reach out to him. @Nicholas Aiola

Good luck.

Build and sell do you have to pay social security tax?

Build and sell do you have to pay social security tax?

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