OfflineI have just completed my first rehab project where I made 30,000 and my mentor has tried to explain to me the short term capital gain tax ramifications that I will receive as a result of this. It is all clear as mud to me because I have never done my own taxes yet. (I am only 22) He said I could face up to 50% taxation on the profit, which is unbelievable to me. He also presented the idea of a 1031 exchange but I do not have another deal lined up just yet. Do you seasoned rehabbers have any way around this or any solutions to offer?
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I don't think there is a way to not pay your Uncle Samuel if you have no other projects to work it off of
Talk to a qualified CPA
Now would be a great time to locate a savvy real estate investor/cpa. Check with your local REIA for recommendations or ask the CPA for recommendations for a qualified CPA who is also an investor
The only thing I can suggest to you is that in the future you need to try and create a company to do your future work under. Now this varies for everyone a little different given each persons location, personal tax bracket, taxable deductions etc. Gets very complicated really quickly. The varying types are sole proprietership (which is kinda what your currently doing), LLC, LLP, S-Corp, C-Corp, and e few others that probably dont apply. Some of the more complicated business models, like a C-Corp for instance, have an almost endless amounts of red tape and setup and maintainence resposibilities, not to mention required involvement of others as officers. However, the tax benefits might offset these complications.
I agree with the above. Check with a qualified CPA or an attornery. I would caution that you need to be careful with CPA's. Well, attorneys as well for that matter!! Most CPA's are suprisingly unqualified to really be helpful to each individuals needs. Likewise an attorney can be as obtuse. Remember who your dealing with. A CPA is going to look at your situation with blinders on and concentrate solely on taxable income and how to pay as little taxes as possible. He/She may not even think out of the box and suggest another company structure because they just dont think that way. A good real estate attorney will be just the opposite. He/she will look at things from a very legal standpoint and not be as inclined to search every nook and cranny to find the lowest taxable way for you to go.
Find one you can trust or that you have a personal relationship with that has a vested interest in your situation. I know nobody will like this idea, but a certified licensed CFP financial planner is probably more qualified than either of the other two to give you the correct answer.
When one sets out to take Rome, TAKE ROME!
Greatness courts failure.
What are the tax benefits of opening a LLC. I ahve been thinking about that for a long time.
The advantages are that the "company" itself does not pay taxes and the red tape that goes along with being a C-corp is reduced substantially. The LLC is set up to avoid the traditional double taxation as with a C-corp. For instance the C-corp pays taxes on income and dispurses bonus or profit revenues to execs and they pay personal taxes as income. Thus the money is taxed twice.
In an LLC the company itself does not pay taxes. The "silent" partners of the company receive pass through income based on preset payments or profit or loss dipursemnts. Those individuals pay their respective tax brackets on that profilt/loss accordingly. They cannot however get paid regularly. ie weekly, bi-weely or monthly. This can be mis-contrued as wages and get you into hot water if your not careful. The "managing" member of the firm basically winds up paying self employment taxes, but has the advantages of a mountain of deductions and write offs.
It is certainly more complex than that. Thats just kind of a nutshell answer. Personally I like the idea. It can really hurt the managing partner though if the company starts making a lot. Find a good tax attorney or CFP.
When one sets out to take Rome, TAKE ROME!
Greatness courts failure.