Calculating profit after flip sells

[Tim G.]

So this seems like a very noob question but I am having a serious brain fart here.  Almost embarrassed to ask this!

I just sold my second flip and i'm trying to calculate the exact profit amount.  I've crunched the numbers several different ways (including the BP flip calculator) and always get a different number.  They are all within about $2000 which is a pretty big swing I think.

I have 2 HUD's (buy and sell), rehab costs and holding costs. Is there anything else I need to factor in?

I think my confusion is in the taxes and closing costs in the HUD's. Some of the rehab cost was also buried in the loan and some was paid by me.

I'd be happy to share the HUD's and numbers with someone who can help me!

[J Scott]

Originally posted by @James Masotti:

@J Scott - I'm going to piggy back this topic - When you and other experienced rehabbers say you're targeting a certain profit...is that before or after paying income tax?

The BP Flipping Calculator doesn't have a spot to accommodate for income tax ...so in the example from @Tim G. above where he made a profit of $24,000...his real profit after paying the income tax (as well as the 15% self employment tax) would be closer to $16,500

Am I looking at this correctly?

I personally don't like to factor tax burden into my pro-forma analysis.  The reason is that everyone's tax situation is different, so a pre-tax $50K profit for one person could look very different to a pre-tax $50K profit for another person.  For example, one person may have a $50K loss in another business they own, so they may not owe any tax on their $50K profit.  And another person may owe $200K in back taxes to the IRS, so they could lose the entire $50K of profit to the IRS.  

Because no two people have equivalent tax situations, I don't think factoring tax into the equation makes sense.  Even if I'm just doing the analysis for myself...

As an example, let's say I buy a property on January 1, sell it on January 2 and make $10K profit.  How much do I now owe in taxes on that $10K?  In theory, probably $0 -- if that's the only money I make this year, my marginal tax rate on that $10K is 10%, but after standard deduction and other credits, I'm probably not going to owe anything.

Now, let's say I buy that exact same property on December 30, sell it on December 31 and make the same $10K profit.  Now how much do I owe on that $10K?  Well, it could be as much as $4000, if all the income I've earned throughout the year has put in in the highest marginal tax bracket (39.6%).  

So, do I do my analysis assuming I'm in the 10% tax bracket, the 39.6% tax bracket or somewhere in between?  You could say that I should use whatever tax bracket I expect to be in that year, but as many investors will tell you, it can be hard to know.  Especially for people like me who have several businesses, and who use different types of tax shelters to that can have hard-to-predict tax implications (at least early on in the year).

For those reasons, I like to ignore tax implications in all my analysis, and assume worst case -- that I'll lose about half of my income to taxes.  When the numbers are better than that -- either because my income was lower or my tax shelters were better -- so be it.  But, at least I was conservative in my analyses...which is what I always strive to be.