Posted by John K Haslach, CPA, MST on May 16, 2006 at 14:13:14:
Short term capital gains are taxed at the same rate as ordinary income, but are not subject to self-employment tax and can offset $ for $ any capital losses. Capital losses can only offset ordinary income up to $3,000 a year. So, there are benefits to having short term capital gains v ordinary income.
John K Haslach, CPA, MST
Flipping Ordinary Income! - Posted by Rainbow
Posted by Rainbow on May 11, 2006 at 07:29:11:
When you buy and sell a property or sell a contract, the money is counted as Ordinary Income, correct?
When you fill out your Tax returns, where does that go?
Re: Flipping Ordinary Income! - Posted by John K Haslach, CPA, MST
Posted by John K Haslach, CPA, MST on May 11, 2006 at 09:03:27:
It goes to intention. Upon audit, the IRS may try to treat any gain as ordinary income and subject it to SE tax. In your organization documents, you should be clear as to your intention. Dot all the i’s and cross all your t’s.
It All Depends - Posted by Jimmy
Posted by Jimmy on May 11, 2006 at 07:50:22:
If you buy the property with the intention of re-selling it ASAP, they YES, you are engaging in a trade or business. this creates ordinary business income or loss. if you do it as an individual, you report the results of this activity in Schedule C.
if you are buying properties with the intention of holding them for rents, you are an investor, and capital gain/loss treatment applies.
a little trickier is the guy who does both. in the course of a year, he buys 6 properties, holds 3 of them for rental, and flips 3 of them.
Re: Flipping Ordinary Income! - Posted by Rainbow
Posted by Rainbow on May 11, 2006 at 09:20:29:
Thank John for your quick response.
In the case of just getting a contract and then selling the contract, there is no question it is simply ordinary income, correct?
I was just wondering where I put that if I have a “S” Corporation.
Also, is it the same if you buy a property with the intent fix it and sell it in a short period of time?
I think the answer would be yes, right?
One more thing, what is “dealer status?”
Re: It All Depends - Posted by Rainbow
Posted by Rainbow on May 11, 2006 at 09:34:59:
I guess that if someone does both, they probably should have 2 different entities. One for buy/sell (this one can buy and sell RE, Notes, Contracts, etc) and the other one to hold for long term capital gains.
The risk of someone doing all under the same entity (even as sole proprietor) would be the IRS disallowing Capital Gains in certain situations.
Re: Flipping Ordinary Income! - Posted by dutch
Posted by dutch on May 12, 2006 at 08:14:44:
Yes, it is ordinary income. You must hold for a year to get CapGains treatment.
Dealer status is an IRS designation that makes you liable for the ALL the income on your properties for the year you sell them, even if you sell on owner carry or lease option.
One of the main reasons that the gurus tell you to run your flips thru a corp (better taxation for “dealer”), and your rentals thru LLC (better taxation for long term holds), plus the diversity in asset protection as each class has different risks.
Any more in depth, you should consult a local attorney or invest in bronchicks Asset library, here or at legalwiz.com
Dutch
OKHomesavers
One entity is OK - Posted by Jimmy
Posted by Jimmy on May 11, 2006 at 11:52:01:
An individual can be an investor and a merchant at the same time. The merchant activities go on Schedule C (as ordinary income or loss—flipping activities). The rental activities go on Schedule E (with depreciation, etc). The sales of investment properties go on Sch D (or 4797).
Same goes for an entity. Partnerships, for example., can have the same diversity of activities. I do my biz in a Limited Partnership. In my opinion, I have not crossed the line into dealer/merchant land, even though I sell 5-6 properties each year. That’s because I acquire 15-20 each year, am expanding, and rental income is clearly the focus of the enterprise, and is growing each year. and most of the sales are of properties I have owned and held for rents for 2-3-4-5 years.
However, if my entity were audited, there is a chance that some of the short term sales might get reclassified as a trade or business. There is no chance that the whole enchilada will be recharacterized. The rent numbers dwarf everyting else. and the short-term sales are really weed-pulling (i.e., I buy a cluster of properties, keep the good ones, and sell some of the ugly ducklings).
In other words, this is not an all-or-nothing proposition. One person or entity can have several distict activities.
If it makes you feel better, you can certainly establish different entities for different activities. There are good and valid reasons for doing so.
Re: Flipping Ordinary Income! - Posted by John K Haslach, CPA, MST
Posted by John K Haslach, CPA, MST on May 16, 2006 at 10:09:53:
The above is not exactly true. You do not need to hold property for more than one year to get capital gain treatment. You need to hold it for more than one year to get long term capital gain treatment. There is such a thing as short term capital gain.
Not at all sure what he is trying to say in paragraphs 2 or 3.
If you are a dealer, your gain is subject to self-employment taxes. If you are an investor, the gain is not subject to SE taxes. By running dealer gain through an S Corp, you can control your self-employment taxes.
Generally, real estate should not be owned in a C Corporation.
Be careful of the tax advice you receive on these pages. You should really spend some time with a qualified professional and discuss your tax situaction.
John K Haslach, CPA, MST
Re: One entity is OK - Posted by Rainbow
Posted by Rainbow on May 11, 2006 at 12:30:13:
I have to agree with you, but you better keep very clear paper trail in every transaction…good records. As long as you can explain it to the auditor and is kept simple then one entity is fine.
There maybe valid reasons to have an LLC for keeper and an S corp for flipping. Depending on income, number of properties, etc, there might be valid reasons to have a complete network of entities.
For example,
You—>Family LLP or Family LLC—>Single-member LLC—>Land Trust
In the above scenario there would be a Land Trust whose beneficiary is a single-member-LLC for each and every property. All the Single-member-LLC’s would have a Member the LLC or LLP.
Sounds complicated and expensive, but is really not that bad.
That could give you the maximum liability protection as well as maximum privacy.
Only you, your CPA, and the IRS would know who is who.
Tenants don’t have to know, buyers don’t have to know, sellers don’t have to know, etc.
Of course, you can KISS!
(Keep It Simple Stupid)
I guess it depends what comfort level you have regarding privacy and liability.
Re: Flipping Ordinary Income! - Posted by dutch
Posted by dutch on May 16, 2006 at 11:52:49:
John,
Thanks for the clarification. However, what is the differnce in tax rate of a short term capital gain, vs. ordinary income, vs long term capital gain?
In paragraph 2, if you sell on an installment sale, but are classed as a dealer, you get to pay income on the entire profit (say you grossed 25K Sell - basis) in the year you sell, vs. installment sale whereby you only pay income on the portion you Collect.
Dutch
OKHomesavers