All I Know Is My Net Was 90k And I Paid 36k In Tax
Not only did i pay out 35k but i had to send out 2 pro rated amouts on 5k by the time my taxes were done. so i had to write a check for 47,000..DOES this make SENSE? Is it normal to feel like you make lots of money but really make ZERO (not to mention the money i DO have it tied up in ohter properties) Its rather depressing as good as it sounds to make 6 figures. i do know one thing. i do a lot of work and give all my money away and have nothing left at the end of the year. nobody seems to have any good ideas for me on what to do to save on 35% of my money. or do they?
Start an HSA. Start a Roth IRA, Traditional IRA, and a SEP (if your investing full time) Claim your self as a real estate professional if this defines you.
"All I Know Is My Net Was 90k And I Paid 36k In Tax"
Doing simple arithmetic, you had $54K left over after taxes to reinvest in other properties, put in the bank, spend on a vacation. If you have nothing left over at the end of the year, then you need to figure out where you wasted that $54K and tighten up your financial management.
Hire a good CPA.
The problem is, is that i dont want to put that much in an ira because i am only 22 and for all i know i could be dead before i am 55 or however old i have to be to use it.. not that im saying i want to blow it all or anything but i want to put a nice downpayment on my personal house. My real question is, is everybody else getting hit just as hard with taxes?
Right now im in the middle of buying trying to buy a building so i can have an office in the bottom and be able to write off an office expense. the only problem with that is its going to be free on my part because its a 4 fam with a commercial bottom so my rents will pay for the building and ill still be making a profit, i just bought a 3 fam that makes 400 a month profit, i dont have many write office because i dont spend a lot of money so it all just gets taken from me. .
[ Edited by ryand on Date 09/27/2006 ]
Thanks for the response,
Ryan
I was under the impression that you had to own the property for 5 years and live in it 2 of the five although not consecutively to qualify for the 250,000 or 500,000 for married couples.
Here is my latest idea. tell me what you think. I am going to take a loan on my "flip" and refi it the next week and pull all of the equity out (tax free) and then leverage it to what i am going to sell it for ...essentially getting paid before the house is sold..Then when the house is sold the buyer pays back my loan and i am exempt from being taxed on this because it was not "income" it was loaned money. make sense?
Unfortunately for your plan, the IRS will say you cashed out your profit when you refinanced. They will say that the difference between your cost basis and your net sale proceeds is your taxable profit. The amount of your loan balance at the time you sold is irrelevent.
i dont understand how they would find out. If you refi your personal house and take out cash and five years later sell your house you dont pay taxes on the money that money.. thats like me going to the bank and taking a personal loan and thenpaying it off and saying i now owe taxes on that money. What does it matter if i pay off my loan or my buyer pays off my loan??
ryand,
The IRS will ask you how much you PAID for the property, and how much you received when you sold the property. The difference is your taxable profit or loss. Notice that nowhere in this profit calculation are you asked how much financing you used. If the difference between your purchase price and your sale price is $50K, then you have a taxable profit of $50K.
Doing a 100% cash out refinance just before you sell to convert your equity to cash, may put that $50K in your pocket sooner, but it does not change the fact that $50K is still the taxable profit from the sale.
If you see that your mortgage balance has no bearing on your profit calculation, you may also see that your refinance strategy only increases your out of pocket costs because you will have two settlements in quick succession, the first for the refinance and the second when the property is sold. You will have the same tax bill but less money in your pocket to pay it because of the extra set of settlement costs.
ryand,
What your forgetting about is putting the money into retirement accounts is that your limiting yourself to just working for your money rather than the money working for you.
With the ROTH IRA you can take your original contributions out after five years if you want to. But why would you? It grows TAX FREE!!!!
Everyone is talking about the same thing. Tax now or tax later.
Tax later means refinanacing and using that money to do other deals and pay the IRS on the back end. Or pay the IRS now and have less to work with.
That percentage tax sounds like capital gains hit you as well. Holding for a year and a day does help a bit with the IRS blow
Move into it and live there for a few years and almost all the tax is eliminated.....
ryand,
If you read all of the posts in detail you would see the best tax strategy has already been offered to you. What more could you want than something like the self-directed IRA or 1031 exchange? Take that $90k and roll it TAX FREE into a new property.
If $54k is poverty level around there, why are you screwing with a rental property making $6k/yr? I would say forget that as that would take up way too much time and effort for the scraps it offers. Focus on buy and sell and forget rentals.
Quote:
On 2006-10-10 23:17, ryand wrote:
Here is my latest idea. tell me what you think. I am going to take a loan on my "flip" and refi it the next week and pull all of the equity out (tax free) and then leverage it to what i am going to sell it for ...essentially getting paid before the house is sold..Then when the house is sold the buyer pays back my loan and i am exempt from being taxed on this because it was not "income" it was loaned money. make sense?
That definately will not work. However, there is an E-Book at www.instantinc.us that may help you.
Consider the following
Watch Out For "Quick Turn" Classification
If you are an active real estate investor, you should be aware of what the IRS calls " Quick Turn Investor status." If you also buy and sell real estate on a regular basis, you may be considered a " Quick Turn Investor " in real estate properties. A Quick Turn Investor is one who buys with the intent of reselling rather than for investment.
There is no magic formula for determining who is a regular investor and who is a Quick Turn Investor, but the IRS will balance a number of factors, such as the purpose for which the property was purchased, how long the property was held and how many deals the investor did in relation to other income. If you take option consideration on a "quick turn" property, you cannot defer taxation of option consideration under Section 1234 of the Code.
The best way to avoid “Quick Turn Investor” classification is to form two corporations, one for “turning” properties and the other to invest in properties (rentals).
that was a great. help.. thanks a lot
Go with those rentals! Not only will you get a depreciation deduction, but when you do sell them (after holding them for over a year) you will be taxed at capital gains rates, which for your bracket sounds like it will be 15%. I would advise holding all of your properties as rentals for over a year to avoid having your profit taxed as regular income.
Chris
I cant wait for the day that my biggest complaint is being taxed on my super good investment income!
I know it isnt any fun paying that much in taxes, but it sure is better than making 40k a year at some job you hate, for the rest of your life. When it starts to bother you, always think about it that way.
[addsig]
36k tax on 90k (25 % + 15% SE) sounds right if its from property held for resale. I think S corp would help a little bit, but then you have to maintain payroll, file Corp return etc.
If you want invaluable information on investing with your IRA, go to the Equity Trust website www.trustetc.com. Good Luck.
I do this with my IRA. Then, I would only allow an attorney to close these deals, that you choose, to ensure you are protected properly.