Short Term Cap Gains On Flippers
i'm putting a deposit on a house thats yet to be built. it'll be ready in about 7 months. at that time
i plan to sell it.
1. can i just pay short term cap gains on the profits or should i be worried about SE taxes.
2. since i'm doing this with a friend, would setting up an LLC change the taxation? how do i put it in an llc?? do i transfer the title to the llc after its in my name, or do i need to do it after putting the deposit on it??
thanks
niravmd,
The first question you need to answer is if you will indeed have capital gains treatment on your sale. This depends on if your sale is of a capital asset, i.e. investment property or a non capital asset (dealer property). This is difficult to judge, but if you sell more than a few you might be considered a dealer and thus recognize ordinary income.
Second, members who actively participate in an LLC's business must pay self-employment tax (SE tax). I believe the medicare tax also applies.
niravmd,
With the strategy you describe, your profits are ordinary income reported on Schedule C. Your self-employment taxes are also calculated on Schedule SE.
An LLC, as you describe your use, will just be a flow-through entity anyway and all the profit from the entity will just flow through to your personal 1040. Using the LLC will not change your personal tax liability.
thanks guys.
from irs publication 925 if got the following:
"A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. " is subject
to captal gains.
since i'm holding the property for the sole intent of gaining
from the appreciation i'm pretty sure i'll be subject to short
term capital gains, and not self-employment taxes.
also, since i'm not planning on doing more than 3 this year i
dont think i'll be hit with dealer status.
Quote:from irs publication 925 if got the following:
"A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. " is subject to captal gains. since i'm holding the property for the sole intent of gaining from the appreciation i'm pretty sure i'll be subject to short term capital gains, and not self-employment taxes. also, since i'm not planning on doing more than 3 this year i dont think i'll be hit with dealer status. I think you would be wrong.
Investment property is property held for the production of income or for future appreciation. You say that "i'm putting a deposit on a house thats yet to be built. it'll be ready in about 7 months. at that time i plan to sell it. Where is your intent to hold this property for future appreciation. I see this clearly as property acquired primarily for resale" -- the definition of dealer realty. Do this three times, and you have engaged in three dealer dispositions. By the way, the magic number of property flips it takes to be classified as a dealer to real estate is ONE.
If you follow this strategy, you are engaged in an active business -- not an investment activity -- and your profits are ordinary income. Report your activities on Schedule C, and compute your self-employment taxes on Schedule SE.
You are taking the informaton in IRS Pub 925 out of context. Rental property activities are passive activities and not considered a trade or business activity. Since you are not planning to use your property for the production of income (rental use), publicaiton 925 does not apply to you. Instead, refer to IRS Publication 544, Noncapital Assets (page 19) for more information concerning the ordinary income tax treatment of merchandise or business inventory (dealer realty is "inventory" to your business activity). .
Suggest you confirm all this with a tax profiessional licensed in your state.