Short Sale Flips and Your Taxes
Different real estate investing strategies have radically different impacts on tax returns. Those who buy and hold asset for over one year advantage from qualifying the wage from rentals as passive income. Depreciation and many maintenance expenses qualify as deductions against any rental income. When asset held for a year or more is sold, the gains are taxed as long term capital gains at a tax rate of 15% (at least for now). Consult your tax consultant for current law and startling changes.
Short Sale Flips and Your Taxes
On the other hand, an Investor who is flipping asset must description the sale as wage and may also be required to pay Fica as a self-employed tax filer. Fica will be due up to the first 6,800 earned in fiscal year 2009-2010. Above that estimate no more Fica is required. Check the new tax changes to see if that will turn for 2010.
The "dealer" designation comes into play when the intention of a real estate sale is to immediately resell the asset and more than one house is sold in a year. You do not want to be designated by the Irs as a dealer. That is a lifelong designation that disallows capital gains rehabilitation of real estate investments and precludes you from doing 1031 like kind exchanges (a tax deferral recipe used by investors to defer the tax on gains on real estate as long as it is immediately reinvested in a asset of greater value). The best way to avoid being personally designated as a dealer is to do all of your transactions straight through an entity like an Llc or Sub S Corp. Your accountant can help you to choose the right entity. You should have one entity for all of your flips and at least one for your long term hold properties. Check with your accountant or tax attorney to see how to avoid being labeled as a dealer.
It is not uncommon for Short Sale Investors to be required to pay 38% to 55% of their total wage in taxes because of Alternative Minimum Tax (Amt) add-ons for higher income-earners. Unless you have a sophisticated business entity/entities set up you will find Uncle Sam at the conclusion table every time.
To avoid any unfortunate surprises either readjust withholdings for Fica with each check you receive, or hold back the estimate you or your accountant expect will be required in a special bank account so you will have it in hand come tax day. This "play it safe" strategy requires some discipline and guidance. Perhaps the best strategy is to hire a book keeper and set up operational procedures to make this an automated process.
On the good side, your Short Sale occupation is bound to mean higher wage than you had in the past. You will need to keep an eye on your tax planning so that you don't get a surprise at tax time. Always consult your tax consultant for current tax law and the best way to maximize your earnings. Stay in a sure mindset and maybe even reconsider yourself fortunate that you need to pay more taxes as the years go by. That just means you have made more income.
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