Buy/rehab/resell real estate. Tax implications?

[Warped]

What is the name of your state? Virginia


Hi,

I looked back a few months on this board but was unable to find an answer to my questions. I am buying a fixer-upper house with the intention of repairing everything that is wrong with it and then selling it at a profit. I do use a tax professional for my income taxes but he isn't available to me right now (vacation) and I need to figure out what my tax liability will be. The rough figures are listed below.

Purchase price: $165,000.00
Estimated repair costs: $ 10,000.00
Market value after rehab: $200,000.00

That should leave a profit of approximately $25,000.00 Is the amount of profit what I will be taxed on? If so, at what percent?

I would really appreciate any help you can offer in this.

 

[Snipes5]

Yes, you will. At either 5% or 15%, depending on your tax bracket.

Snipes

 

[abezon]

If you're doing this once, it's capital gains. (Don't forget to add all costs of rehab, like mileage to the building supply store!) If you start fixing up houses regularly, at some point the IRS will deem it a business and require you to pay self-employment taxes.

BTW, if you live in the house for 2 full years while you're fixing it, you can exclude all gains from income when you sell.

 

[Warped]

Thanks for the advice! I might start doing this regularly if it proves profitable on a regular basis. I already have a business license but it doesn't include this type of business. The next renewal is coming up soon and I'm sure I can add this onto the license at the next renewal if it comes to that.

How do self employment taxes work if I still have a regular full time job?

Thanks again for the help!

 

[Whatamimissing]

Self employment taxes work like this: Say you have 100 dollars. Take 15 dollars and flush them down the toilet. You have now paid self employment tax.
Seriously, if you are going to get into this business you need to get incorporated. It limits your personal liability and gives you tax advantages. Good luck with the house.

 

[John Carson]

Warped, you will also have real estate commissions (5-7%) that you pay broker when you sell so subtract $12,000 from your $25,000 profit and you are left with $13,000. Also, assume you have to borrow $150,000 at 6% interest to make purchase and cover fix up costs. If you take six months to fix up and sell then that is $4,500 in interest you have to pay so subtract that from $13,000 profit and you are left with $8,500 profit. Also, you will have real estate taxes and home insurance during the six months you own so assume you pay $2,000 for that so now you have a grand total of $6,500 profit for six months work with considerable risk of not being able to sell when you want, unexpected fix up costs and rising interest rates on your loan and on the loan of potential buyer. Is it worth it? By the way, I put my profits from doing this on Schedule D of my 1040 tax form. I also have S corporation which I do this under and the profits flow through from Form 4797 Sale of Business Property to my Schedule K1 to my Schedule D of my 1040 then to my 1040, all approved by my accountant. S corporation pays no capital gains tax on sale.

 

[Snipes5]

S Corps don't pay taxes. They are a pass-through entity. The capital gains taxes are the same as they would be if the S Corp didn't exist.