Flipping - Taxes

[Derek Kerley]

I might be missing something but when I do calculations for potential flips, such as 70/30. The numbers work, but when I take into account taxes I would have to pay on my gross profit (purchase price - sale price) it does not make sense to flip. Any help would be greatly appreciated!

[J Scott]

Derek,

Based on a comment you left on one of my blog posts, I think you might be missing something here.  Let me provide an example:

-  You purchase a house for $50K

-  You spend $40K rehabbing it

-  You spend $10K on taxes, insurance, utilities, loan costs, etc

-  You sell it for $150K, but you only get $140K check at closing because you spend $10K on commissions and closing costs

In this example, you earned $150K (gross income), but spent $50K + $40K + $10K + $10K (total of $110K) on cost of goods sold (in other words, your expenses).  So, your "profit" on this deal, pre-tax, is $40K.

On that $40K you will pay taxes, so your profit will be reduced by some amount.  Most likely that tax amount will be between 15-50% of the $40K, depending on your entire tax situation, so you can expect to walk, after taxes, with about $20-35K.