typical tax approaches of flippers

[jdeity]

if your business is just buying houses cheap and selling retail, and you go through a good amount in a year, what exactly are your best strategies for reducing taxes?

i'm not looking for someone to hold my hand and explain them to me, i'm just confused as to what the actual strategies are.  1031's seem to be too complex and inefficient for someone who moves through, say, 10 houses a year, but i'm a newb so who knows maybe that is the way.

[DannyTheGreat]

As a flipper you will pay ordinary income tax on your profit. Your properties will be considered inventory just like you were buying and selling TV's or something. Therefore you have very few if any tax loopholes available. 1031's are used to defer capital gains tax which you will not have.

[jdeity]

there's really not a lot of loopholes?  the guy who runs my local REI club always boasts about how little taxes he pays, and i know flipping / rehabs are the core of his business.

of course he is always trying to sell ~3K courses, so who knows how much credibility should be placed on anything he says

[kdhastedt]

You cannot use a 1031 for flipping...you need to have owned the property a year and it is used (as Danny noted) to defer long-term Capital Gains to a new property...

Keith

[jdeity]

and that would be the only option out there to do *anything* to lower taxes?

[kdhastedt]

We can't, in good conscious, tell you specifically how to reduce your taxes...that is a very individual thing based on scads of different factors.  There are dozens of ways to shelter income against taxes...we simply don't have enough data on you, your business, etc...

It all seems pretty speculative anyway in that you haven't done any REI business that needs shelter.  

Perhaps you should confer with a CPA/Financial Advisor...?

Keith

[jdeity]

not looking for a specific tax plan for me.  i know people who have rentals can use 'depreciation' or something like that.  my inquiry, 'typical tax approaches of flippers', is exactly that.  what specific things do flippers go, not please tell me what i should do.  if they do nothing special, they do nothing special.

[kdhastedt]

They take the price they paid, add all of their deductable expenses/capital improvements then subtract that from what they got for the property...the number that is left is taxable.

Unless, you can shelter that -- like I said, "...you should confer with a CPA/Financial Advisor..."

Keith

[jdeity]

'unless you can shelter that'

what does that mean?  i'm 23, and have never done my own taxes, what is sheltering?  is there a way flippers shelter, or is sheltering someone everyone does?

[deaaak]

Sheltered simply put means deferring or not having to pay taxes on earning, gains, income or anything else that would normal be subject to taxation.

If there is a way for you as a flipper to "shelter" taxation it would be unique to your individual circumstances.

If you plan on staying in this business for the long term then your best bet would be to find a good CPA or tax advisor now since you will need one down the road anyways...build the relationship/partnership now.

[kdhastedt]

Anything that you do to legally avoid paying tax is 'sheltering'...

For example:

- Do you have retirement accounts through your employer (i.e., 401K/403B/TSP, etc.)?  Are you making maximum contribution?

- If you or your spouse (in your case your future spouse) are not covered by a retirement plan at work, do you make maximum contribution to IRAs in accordance with the tax laws?

See?   It is very personal -- what works for me may not work for you because of income levels, jobs, etc...


Keith

[RELinda]

talk to an accountant, but mileage, office supplies, cell phone, car payment, etc. all can be deducted.  Keep receipts of everything and write off most things, and then when you do your taxes you can show a little profit instead of the whole thing.  

[REIinIL]

I bought an airplane.....nothing sucks money faster!

[RELinda]

Where in IL is the airplane?  I can go for a ride.....Im in IL

[jdeity]

talk to an accountant, but mileage, office supplies, cell phone, car payment, etc. all can be deducted.  Keep receipts of everything and write off most things, and then when you do your taxes you can show a little profit instead of the whole thing.  

okay let me ask some specific questions on that.  by mileage, do i deduct gas too, or just keep track of mileage and deduct that only?  do i keep track of it, or how do i go about proving the actual mileage used?

cell phone - i pay mine online, how do i keep proof of that?  same for car payments?

as far as business supplies, i will keep receipts handy.  can i deduct things like educational materials for my business?  like receipts for books purchased that are about realty?

also, do i need to register as a business or sole proprietor, or can i just file my regular taxes, list income as my profit from buying / selling houses, and just deduct stuff?  i guess i'm shaky as to how formal the 'deduction' process is.