All Forum Posts by: Bill Walston

Originally posted by Steven Hamilton II:

Bill you are not always a dealer if you are flipping properties. In the case of Joe down the street who buys his neighbors house and fixes it up, he is not a dealer he just bought a capital asset to sell he has not and will most likely not be engaging in any further "flipping" activities. This would be a capital asset.

Sorry Steven, I have to disagree. I cannot think of a situation when "flipping" properties has not be considered a trade or business. If Joe down the street buys his neighbors house with the intent to fix it up and sell it for a profit, and not hold it as a rental, the proceeds would be considered ordinary income. The fact that he's "never done it before" and "will never do it again" does not change the character of the transaction.

That being said, would the IRS disallow his treatment if he characterized the property as a 'capital asset?' Probably not, since you know as well as I that "intent" is difficult to prove. Unless, like many buyers, in an effort to be 'completely transparent' you include the disclosure 'buyer intends to sell the property for a profit' in your P&S Agreement!! Don't laugh! You know you've seen it! :)

Originally posted by Wesley Chamberlin:

This should be an easy one for someone to tackle, but I'm very new at this. I close on my first investment property next month. Not sure whether to flip it or rent it due to tax considerations. I understand that if I flip I will be taxed at my income tax rate (25%), but if I hold it one year it will be taxed at capital gains rate (15%). Am I correct so far?

Not quite. If you purchase a property with the intent to 'flip' it you become a dealer, not an investor. The income will be taxed at ordinary rates regardless of when it it sold as the property is treated as inventory.

If you hold the property as a rental and then sell, some of your profits will be taxed as capital gains.

Regardless of whether you flip or rent, the $12,000 (in most cases) will be added to the basis of the property.

Originally posted by George P.:

so, on to my question:

q: if i have a mortgaged property, can i sell it on a land contract??

In most cases, yes. Sellers have been doing this for years.

Some details:

1. outstanding mortgage amount is 40k at 30 yrs.
2. still have to contact the lender (provident) to see if i have a clause in the contract that does not allow me to do that.
3. do not have a buyer, but if the answer is a "yes", will list it on the MLS.

You probably will not find a clause in your contract prohibiting transfer by land contract. The prohibition will be in the dreaded due on sale clause which prohibits the transfer of any 'rights or interests' in the property. This would certainly include a land contract.

Are you planning on listing the property on the MLS as a FSBO?

K Marie, I be interested on knowing the reasoning for your opinion that "Contract for Deeds and Land Installment Contracts are ... Bad for everyone involved." Selling a home on a land contract, when done properly has benefits for both buyer and seller. It's a strategy that has been used successfully for years.

Originally posted by Kyle Meyers:

http://www.aicpa.org/Publications/TaxAdviser/2011/July/Pages/fava_jul2011.aspx#fnref_16

Does this apply to rental income too? The article makes it seem like it does unless you are a real estate professional.

Yep, this will apply to net rental income. This is a 3.8% Medicare tax on “net investment income.” Net rental income is subject to the Medicare tax unless the rent is derived in the ordinary course of a trade or business.

I wrote a blog post explaining the law back in September 2010. Shoot me a PM if you're interested in the link.

Originally posted by Steven Hamilton II:

I'm almost willing to bet that if I went through your tax return with you that I would find some kind of mistake or item left out.(I won't bet because I'm too darn cheap to actually wager).

Steven Hamilton II, spoken like a true numbers guy! We do tend to know how to stretch a dollar, don't we? :)

Absolutely right @David Beard ...Of course it will come into play for tax. What I SHOULD have said is that the loss may not all be deductible in the year of the replacement.

Thanks for pointing it out...

As @Steven Hamilton II said, the loss could be subject to limitations.

Thanks for the catch Steven.

Funny, I knew exactly what I meant to post...I blame it on pulling an all nighter :)

Dan Inc, several of us have expressed the opinion that you should be looking for another accountant, as the one you are using clearly is not up on the ins and outs of real estate transactions. Yes, it 'IS easy for [us] to say, as most of us have probably 'been there, done that.'

You even go so far as to defend her, stating that 'not many accountants are going to know how to take an interest deduction on a subject-to deal.' I don't disagree. That being said, the accountants who deal with real estate investors on a regular basis make it their business to know. It is not your job to educate your accountant. If you are going to that why not just buy Turbo-Tax and do it yourself?

You need and accountant who is going to be able to help you, together with the other members of your power team, structure your real estate and other financial transactions in such a way that you get the benefit of every possible tax deduction. I don't think that you have that now.

It's not just the amount of the money that you earn, but also the amount that you keep.

Just sayin' :)

Originally posted by Ryan Pyle:

I think I just answered my own question. I think it should be this:

CR Carpet $1,010
DR Gain/Loss on Asset Disposal $700
DR Accumulated Depreciation $310

This is the correct accounting entry to remove the asset from the books. You mentioned, however, that you replaced the carpet so the 'loss' most likely will not be recognized for tax purposes. I suggest you run this by your tax pro.

Ebere Okoye, is some of your post missing? I ask this only because some of your post makes absolutely no sense...

Originally posted by Braden Souder:

Can you be a multi-member llc taxed as an s-corp even if its only yourself (1 person) in the business?

Braden, no, you cannot be a MMLC. A MM-LLC must have two or more members. You CAN, however, be a single-member LLC taxed as an S-Corp.

Short answer: All things being equal, for flips or rehabs (which generate ordinary income) you would most likely choose the S-Corp election. For "buy and holds" (rentals) you would use the default status for taxes. Since you are a SM-LLC the rental income and expenses would be reported on a Schedule E on your Federal 1040.