Capitol Gains?
O.k. Im new to REI, but things are moving fast...
Ive got two properties that Ive made offers on
1) offer in at 85k house appraises at 120k
2) offer in at 228k and appraises at 285k
the question I have is this, if I buy these two properties...paint and carpet...and put them back on the market immediately, what taxes and rates will I pay besides the state excise tax? capitol gains on the profit @ 15%, capitol gains on the profit @ my income rate?, straight income tax?
thanks for helping the "new guy"!!
Your profit will be taxed as self-employment income the same as if you received a salary. Ordinary income tax rates plus the social security and medicare tax withholdings apply.
No, the entire amount is deductible. No need to separate.
Self-employment income taxes apply to active income not to passive income, regardless of whether or not a pass-through business entity is used.
If you are engaged in a rental property activity, whether in your own name, or under an LLC, the income is passive income and not subject to social security and medicare withholdings.
If you are engaged in an active income business, such as property flipping, property management for others, landscaping, plumbing, etc., then your business income is treated as ordinary earned income. If you are a sole proprietor (such as a single member LLC), then all of the www.income.is considered self-employment income and social security and medicare taxes apply.
This self-employment income tax bite can be managed somewhat if your business activity is done withing an S-Corporation. Now, IF you take a reasonable salary, only the salary you take is subject to the social security and medicare withholdings. Any income earned by the S-Corp that exceeds what you are paid in salary is passed through to the shareholders as a dividend free from self-employment income taxes. Of course, ordinary income taxes still apply to both salary and dividends.
Fail to take a salary, and the IRS will declare all of the S-Corp income as self-employment income.
They keep track by 10-99 and other reporting requirements, but the main way is through an audit if your return has red-flags or if you are unlucky.
For the last several years after each sale I receive a substitute 1099-S from the closing attorney....they enter your SS # into that giant vault and believe you me, they can tell if you made a profit. ....there is no hiding from the feds.
they also see the money "moving" though your bank account. any amount over 10k and the bank reports it to the irs....you have to cash that profit check somewhere........km
Thanks for all the insight guys! That helps a lot.
about all i do is l/o. for me the advantages are great. but hey thats me. we all have to decide between the pros and cons to determine what is best.............km
i also will sell out right or sell contract for deed......km
you can also open an self directed ira use the money to purchase a prop. and put all the profit back into the ira, since it is self-directed and have your profit defered...km