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Updated almost 6 years ago, 02/27/2019

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63
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Jason Smith
Pro Member
  • Weatherford, TX
42
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63
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Must I pay Self Employment tax from doing part time RE

Jason Smith
Pro Member
  • Weatherford, TX
Posted

In the midst of doing taxes this year my CPA says she feels that I need to file as Self Employed  because of the amount of time I spend doing RE.  I only do this part time and have a full time earned income job.  I flipped 1 house last year and added 2 rentals.  I am not trying to pull one over on the gov but filing this way will cut my refund in 1/2 as opposed to filing as capital gains and not SE.

So what are your feelings as to the best thing to do here?  What is actually required vs what is best practice?  How should I proceed?

thanks in advance

  • Jason Smith
  • User Stats

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    Jason D.
    • Rental Property Investor
    • St. Petersburg, Fl
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    Jason D.
    • Rental Property Investor
    • St. Petersburg, Fl
    Replied

    @Jason Smith I'm not a CPA, but it's my understanding that you'll need to pay self employment tax on the flip income, but not the rental income.

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    Lance Lvovsky
    Pro Member
    • Accountant
    • Fort Lauderdale, FL
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    Lance Lvovsky
    Pro Member
    • Accountant
    • Fort Lauderdale, FL
    Replied

    @Jason Smith

    If intent was to flip that is subject to self employment tax. If intent was to hold for investment then no SE tax.

  • Lance Lvovsky
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    Doug Wright
    • Radcliff, KY
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    Doug Wright
    • Radcliff, KY
    Replied

    If you own a business in real estate and pay yourself a salary from the business you can avoid SE tax on flips, as long as properties are titled in your business name. You must pay yourself a reasonable salary for what you do. In your case it sounds like your CPA is giving you the correct advice.

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    Basit Siddiqi
    Tax & Financial Services
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    • Accountant
    • New York, NY
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    Basit Siddiqi
    Tax & Financial Services
    Pro Member
    #1 Classifieds Contributor
    • Accountant
    • New York, NY
    Replied

    @Jason Smith

    The amount of time spent doing real estate is not a good reason that you should be paying self-employment taxes.

    Rental income is excluded from paying self-employment taxes.

    With that said, you may be subject to self-employment taxes on the income earned through the flip.

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    Basit Siddiqi CPA
    4.9 stars
    69 Reviews

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    Eamonn McElroy#4 Tax, SDIRAs & Cost Segregation Contributor
    • Accountant
    • Atlanta, GA
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    Eamonn McElroy#4 Tax, SDIRAs & Cost Segregation Contributor
    • Accountant
    • Atlanta, GA
    Replied

    @Jason Smith

    Activity level by itself has nothing to do with whether sale of a property is ordinary income subject to SE taxes or cap gains.

    The tax court examines a few different factors, none of them being determination alone.  One of the primary factors, as @Lance Lvovsky mentioned, was your intent when you initially acquired the property.

    The fact you're calling it a flip would indicate you originally purchased the property with the intent to resell for a profit.