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Updated almost 6 years ago, 02/27/2019
Must I pay Self Employment tax from doing part time RE
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 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.
@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.
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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@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.
- Basit Siddiqi
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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.