Write Offs On A Flipped Property
I am trying to find out what can be written off (mtg interest, repairs, closing costs, etc.) when I sell my flipped property in less than six months.,
I am trying to find out what can be written off (mtg interest, repairs, closing costs, etc.) when I sell my flipped property in less than six months.,
higginb,
I am not sure what can be written off with a flip. I wanted to get into doing a flip on a property myself. I just read that the IRS is changing the law on people that do not hold a property for at least a year and do a flip that you will pay up to 35% in taxes on your profit.
higginb,
Property flipping is an active income business. If done as a sole proprietor, you report your income and expenses on Schedule C and Schedule SE.
For Schedule C, the "Cost of Goods Sold" will be the sum of your acquisition cost, rehab cost, holding cost, and selling cost -- in effect, every penny spent on the property. This cost is subtracted from your revenue (sale price) to determine your net taxable income.
JRendell,
Flip profits have always been taxed as ordinary income at whatever marginal tax bracket rate the taxpayer happens to be in. Since this has always been the tax code, could you be more specific about which changes to the "law":you are talking about?
Perhaps what you heard is that the IRS will start taking a closer look at 1031 exchanges to disqualify those that are really dealer dispositions (property flips).
I am very new at this so thank you. I am also considering starting a s corp does this make a difference?
NewKidInTown3,
I am looking into getting into some kind of rehab or flipping a property also. I am new to this part. I think I read the article on CNNMONEY. I am not sure where, but that is what I remember.
Quote:I really wonder if the flippers ... I wonder how they can make it work since there is a fair amount of risk in flipping. If they use a RE agent that also eats into the profit and takes it over 50% in costs of a flipfinniganps,
It is really easy. Here are a couple of examples from my own experience. Last year, in September a condo for $92900 and in December, I bought another condo for $94900. In March, I could have sold each of them for $150K. In June of this year, I bought another condo for $110K. In July, I was offered $149K by an all cash buyer (no agent involved).
Even if state and federal taxes consumes half of my $150K "profit" in these three properties, I still have $75K left over. If I only do one property every two months at this rate, I would easily net $150K per year after taxes.
I think a flipper could make it easily in my market.
higginb,
The basic guideline is that you will pay tax at ordinary income tax rates (for whatever business entity you are using) on the difference between the income from your activity minus the costs to create that income. About the only tricky item is that you do not get to deduct principal paydown component of any loans you have.
Also, if you are engaged in flipping properties then the properties are inventory and not capital assets so they are not depreciated and any gain is taxed at ordinary rates.
Short term capital gain will be taxed as ordinary income! That means the tax brackett rate you are in. Net income after all deductions basically plus capital gain gives you amount you will pay tax on. (Simplified explaination)
Long term capital gains are taxed at a capital gains rate which may be different depending on your income. Also the type of investment. Long term capital gains may also trigger the AMT.
You pay yhe taxes as you said when you file next year. You may however send in estimated tax and in some situations may be required, depending on your status tax wise. Investment real estate is sometimes taxed at 25%. The difference in the type of investment long or short term can save you or cost you.
Read here and fool with the calculator:
http://www.smartmoney.com/tax/capital/index.cfm?story=capitalgains
Also the tax your real estate agent is probably referring to is the state property tax, Many states charge taxes on property every year, based on tax value.
thanks for your reply.
MD requires that a certain percentage of the sale profit be withheld at settlement if the seller is not a resident of the state.
If you are an out of state seller, then perhaps the state where the property is located has a similar requirement. If so, then you just clain a credit for the withholdings when you file your non-resident state income tax return for the year of the sale.