lets talk taxes

[James Friedrichsen]

Ok investors, I've been trying to wrap my head around all these different taxes that rehab/flipping businesses are subject to....cant anyone put the different types into laymans terms or at least point me in the right direction. I want to understand these so I can have my ducks all in a row. Thanks

[Jon Holdman]

Fix and flipping (and wholesaling) is exactly like a retail store. Or, more accurately, like a manufacturing business. You buy raw materials (junky houses, building materials), put in labor, and then sell your finished product. The net income (the price you sell it for less all costs) is taxable. Because this is a self employeed business, you're subject to three taxes:
1) Federal income tax - this is just ordinary income
2) State income tax, if your state has one - same as for federal. Life gets more complex if you live in one state and rehab in another. You'll pay tax in both.
3) Self employment tax - this is medicare and social security. From a regular job, you pay half and your employer pays half. Since you're self employed, you pay both halves. There are ways to organize your company than can turn some of the income into dividends and avoid this tax on the dividends. But it assume you're making more than would be a reasonable salary for the job you're doing.

Rentals are taxes on net rental income. The $1000 from a rental in your example, Anthony O is the revenue. From that you subtract all your expenses, the interest you pay and depreciation. If that's a positive number (it should be, on good rentals), that net amount is just ordinary income and subject to the same taxes as above.

Capital gains tax comes into play when you sell an investment. Rentals are investments. Fix and flips are not - they're inventory. Taxes on sales of rentals are a complex topic, and I don't think it comes into play for James Friedrichsen.

Nope, doesn't matter. Its still inventory. This wouldn't survive an audit.