When would long term gains be taxed as self employment income?

Tax, SDIRAs & Cost Segregation
5yFollow

When would long term gains be taxed as self employment income?

Chad C.
Denham Springs, LA · Member since 2015 · 133 posts · 35 votes

I currently work full time, and I have 10 properties that I have installment sales on, and they will be taxed using long term gains. I got the impression from my CPA that if I was to reduce my employed hours enough(or quit), that the installment sales would be taxed at self employment income rates. I asked where the line was, and he said I need about 60% full time employed to use long term gains? Any input or clarification?  Is this just following the 50% rule of real estate professional status guidelines?

I am trying to figure out if I can reduce my employed hours, keep my income low, less than 40ishk and get in 0% capital gains bracket. Or make 60-80k in rental income (from other regular rental properties)and depreciate enough to show less than 40k. Then pay 0% tax on those 10 properties.

I have been trying to figure out how to obtain REP status to pas losses on, but maybe I want to avoid it so I don’t have to pay self employment tax. it seems that there may be a sweet spot, or efficiency spot, while I transfer to full REP status.

0Reply
49 views

Most Popular Reply

Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
Originally posted by @Chad C.:

I currently work full time, and I have 10 properties that I have installment sales on, and they will be taxed using long term gains. I got the impression from my CPA that if I was to reduce my employed hours enough(or quit), that the installment sales would be taxed at self employment income rates. I asked where the line was, and he said I need about 60% full time employed to use long term gains? Any input or clarification?  Is this just following the 50% rule of real estate professional status guidelines?

I am trying to figure out if I can reduce my employed hours, keep my income low, less than 40ishk and get in 0% capital gains bracket. Or make 60-80k in rental income (from other regular rental properties)and depreciate enough to show less than 40k. Then pay 0% tax on those 10 properties.

I have been trying to figure out how to obtain REP status to pas losses on, but maybe I want to avoid it so I don’t have to pay self employment tax. it seems that there may be a sweet spot, or efficiency spot, while I transfer to full REP status.

If the sale has already happened, they will never be self-employed income. 

Also, the self-employment income would never be reported as installment sale.

I think what your CPA might be saying is if you start selling new properties as flipper/dealer, you new income will be subject to SE taxes. 

[email protected]941-914-7779
INVESTOR FRIENDLY CPA®5240 Reviews
WebsiteView Page
TaxMD® | Tax Planning Software
WebsiteView Page
2Reply
See this reply in the discussion

11 Replies

Jump to latestLatest
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Chad C.:

    I currently work full time, and I have 10 properties that I have installment sales on, and they will be taxed using long term gains. I got the impression from my CPA that if I was to reduce my employed hours enough(or quit), that the installment sales would be taxed at self employment income rates. I asked where the line was, and he said I need about 60% full time employed to use long term gains? Any input or clarification?  Is this just following the 50% rule of real estate professional status guidelines?

    I am trying to figure out if I can reduce my employed hours, keep my income low, less than 40ishk and get in 0% capital gains bracket. Or make 60-80k in rental income (from other regular rental properties)and depreciate enough to show less than 40k. Then pay 0% tax on those 10 properties.

    I have been trying to figure out how to obtain REP status to pas losses on, but maybe I want to avoid it so I don’t have to pay self employment tax. it seems that there may be a sweet spot, or efficiency spot, while I transfer to full REP status.

    If the sale has already happened, they will never be self-employed income. 

    Also, the self-employment income would never be reported as installment sale.

    I think what your CPA might be saying is if you start selling new properties as flipper/dealer, you new income will be subject to SE taxes. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5240 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
    2Reply
  • Chad C.
    OP
    Denham Springs, LA · Member since 2015 · 133 posts · 35 votes
    5y

    @Ashish Acharya so if I had no income, I  wouldn’t pay taxes on the monthly payments? I would pay taxes on monthly payments at a ratio of 

    cost basis/sales price at a rate of 0%? 15% if income is over 40ishk?


    I am buying properties with intentions to installment sale. I will rent for 12 months if it gets me into long term rate

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Chad C.:

    @Ashish Acharya so if I had no income, I  wouldn’t pay taxes on the monthly payments? I would pay taxes on monthly payments at a ratio of 

    cost basis/sales price at a rate of 0%? 15% if income is over 40ishk?


    I am buying properties with intentions to installment sale. I will rent for 12 months if it gets me into long term rate

    Monthly payments have interest income, so you would pay some tax. 

    If you have no other income and your cap gain is below the threshold of 0% tax, yes there would be no taxes. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5240 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
    2Reply
  • Chad C.
    OP
    Denham Springs, LA · Member since 2015 · 133 posts · 35 votes
    5y
    0Reply
  • Chad C.
    OP
    Denham Springs, LA · Member since 2015 · 133 posts · 35 votes
    5y

    Thanks! @Ashish Acharya

     I don’t charge interest, just a sales price. I will buy a 70k property for 50k, and sell it for 180 monthly payments of the typical rental rate 900-1200, or around 200k. 

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Chad C.:

    Thanks! @Ashish Acharya

     I don’t charge interest, just a sales price. I will buy a 70k property for 50k, and sell it for 180 monthly payments of the typical rental rate 900-1200, or around 200k. 

     You dont have an option to not charge interest. If interest is not stated in the contract, it has to be imputed when tax return is filed. If not,  IRS will impute the interest and send you a notice. Your CPA will know this. Talk to your tax advisor. I have seen people pay a huge amount of penalties on this issue. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5240 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
    1Reply
  • Chad C.
    OP
    Denham Springs, LA · Member since 2015 · 133 posts · 35 votes
    5y

    @Ashish Acharya that is some good info. I will talk to him, we talked an hour the other day, and I probably only absorbed 1/10th of it. It seems that AFRs are 1.5-2.5%

    0Reply
  • Chad C.
    OP
    Denham Springs, LA · Member since 2015 · 133 posts · 35 votes
    5y

    @Ashish Acharya my CPA has a draft return for me, and we spoke about the imputed interest. I just don’t see it on the returns though. Is there a line on form 6252 that shows this division? Line 25?
    For one mobile home, I received payments of $7,700 multiplied by .628760 is $4841. He has line 24 and 26 as $4841, I don’t see where any interest is paid.

    Selling price is $37,100 x AFR 1.98% is $732, should installment income be $4109, and ordinary income be $732? 


    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    5y

    @Chad C.

    The interest should be reported on Line 2b of Form 1040, not on 6252. 

    However, asking here for clarifications of what your CPA did is somewhat disrespectful. You should be asking your CPA.

    0Reply
  • Chad C.
    OP
    Denham Springs, LA · Member since 2015 · 133 posts · 35 votes
    5y

    @Michael Plaks yeah, I just feel like I’m bothering him and worry that I should trust what he is doing. I’m just trying to understand, and use the available resources. On the other hand I am paying him, and it seems reasonable to me for him to explain it to me. I asked him where the interest was, and if it should be reported on 2B of the 1040, and he said the software was not imputing interest.

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    5y

    @Chad C.

    Yes, you're bothering him in some way, but this should be part of your professional relationship. Otherwise, you need to either adjust this relationship (pay for the support if it is extra cost) or look for a more complete service elsewhere.

    Speaking of bother, I'm bothered by his response blaming the software, if this was indeed what he said. He should know why the software did not report it and, if the interest was supposed to be reported, correct it.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free