Investing in Real Estate, Flipping Houses, and income Taxes
Understand the tax consequences of flipping houses, rehabbing houses, and how to defer taxes with the 1031 exchange before you get into real estate investing. Problems arise when real estate investors don't result federal and state tax laws. This is why you need professional advice. Although I am not a tax advisor, here are some tasteless mistakes starting real estate investors make by not understanding tax liabilities:
Investing in Real Estate, Flipping Houses, and income Taxes
Flipping Houses
The presume flipping houses is a mistake for some beginners is that they don't know the earnings tax consequences. One qoute with flipping houses, or selling too many properties too quickly, the Irs could say that your real estate business is your trade, branch to lowly earnings and self-employment taxes.
Self-employment tax, a communal protection and Medicare tax primarily for individuals who work for themselves, is similar to the communal protection and Medicare taxes withheld from the paycheck of most employees. The self-employment tax rate costs you 15.3% of your profits. (However, this may provide relinquishment benefits.)
Rehabbing Houses
Another tasteless mistake that starting investors make is selling a asset after retention it for practically a year. Some rehabbers work part time on a fixer and take six months to get the house ready. Add on two months to sell with a 60 day closing, and they're up to ten months. To take advantage of the low 15% capital-gains tax rate, you must keep the speculation asset for at least a year before selling. If you sell before a year, your tax rate, the usual capital gains rate of 35%, could eat up a vital whole of your profits.
If you're rehabbing houses, be patient. You could save thousands in taxes by retention your asset just a few more weeks.
1031 Exchange
However, the Internal earnings Code provides real estate investors away to defer capital gains taxes indefinitely. Section 1031 of the Internal earnings Code provides a tax-free exchange. Also known as a "like-kind" exchange, this code allows you to sell a business or speculation asset and defer capital-gains taxes by immediately reinvesting the gains into a similar piece of property. The key, replacing a business or speculation with similar property, means that no gain gets paid to the investor. Any behalf taken out of escrow gets taxed. This means that starting investors might take out a portion of the behalf after they thought about explore their tax liabilities. In other words, talk to an accountant and find out what your tax would be agreeing to your current usual income. Many business owners take advantage of this because they have many business deductions.
The big mistake starting real estate investors make doing a 1031 tax-free exchange, taking rights of the profits, voids the tax deferment. You must pronounce the sale of your asset to be a part of a 1031 exchange before you sell the property. Then you have the money placed in a trust catalogue held by an intermediary until you buy the new speculation property. You have 45 days to recognize a exchange asset and 180 days to close on the new investment. You can't buy a original house or a vacation home with funds from an speculation asset and defer taxes in a 1031 exchange.
The best advice for starting real estate investors:
Talk to an accountant.
Would you be great off production extra money, even if you must pay taxes?
© 2005 Jeanette J. Fisher.
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