If you turn the house over, you’re probably too familiar with the process.
First, you need to find and buy the house that you think is most likely, then remodel it, and finally put it up for sale. The main goal of flipping real estate is to buy, refurbish and sell your investment as soon as possible while receiving the maximum profit possible.
As a Certified Accountant, I work with a variety of investors.
Some people buy, hold, and rent investment property, while others decide to buy, improve, or sell. Personally, I don’t have the knowledge, time, or stomach to fix or turn inside out.
Don’t get me wrong ….. This doesn’t mean that some of my clients don’t see the huge profits they make in this lucrative business. With the great profits of the flipping business over the last few years, we are meeting more and more clients who are flipping real estate full time.
It is important to understand the tax obligations you may be facing when you buy and turn over real estate. Uncle Sam always wants a part of the action, so be prepared for him to receive a part of your profits. You may be taxed at the state and federal levels and may even be subject to self-employment tax. If you’re not careful, a whopping 25% to 55% can be an uncle sum share.
Below are some suggestions and considerations that you can use to maximize your profits from real estate flips while minimizing your tax obligations.
Formation of corporation
If you are actively reversing properties, it is important to consider forming an entity that provides both asset protection and tax savings.
If you form an entity, you may be protected from personal liability in the event of business debt or proceedings.
In addition, using the right legal entity can help self-employed people significantly reduce their taxes. Using a limited partner structure or SCorp’s dividend / payroll strategy can help reduce the majority of self-employed tax from tax invoices.
Get a license
Working with a realtor or broker definitely has its benefits, but keep in mind that you are paying for it.
For example, if you sell real estate for $ 500,000, the broker or agent’s sales commission can be $ 25,000 or more. That’s $ 25,000 from your earnings. Obtaining a license helps you maintain profits in every transaction you make.
Correct your number
I once met a gentleman who said he had a thriving flipping business with over $ 4.5 million in assets under his control.
Examining his poor financial situation, he found that not only did he not make as much money as he expected, but he actually lost more than half of his transactions.
Due to lack of accurate financial information, he could not know how much profit or loss he made on each flip property. Due to the excess investor funds in the banks, this flipper actually had a false sense of profit for the company simply by using the investor funds.
Cash can be tight, especially for fixed-and-flip businesses. Make sure you have accurate monthly finances to keep track of your rehab project’s income and expenses and adjust as needed.
The best bookkeeping tip I give is to make sure you keep track of your income and expenses by property. Creating a report for each property is essential to the financial position of the flip business.
1099 Your contractor
No one likes to pay taxes, and it’s the same for many contractors.
What many flippers may not know is that it is the payer’s responsibility to issue 1099 to the people you pay for. Believe it or not, if you are audited and the IRS finds that you did not issue the required 1099 to the contractor, they will pay you tax on your behalf. You may be held responsible.
The safest way is to get the paperwork from the contractor and issue the required 1099 as needed.
Have you ever paid a contractor during the year and tried to get their Social Security number and issue 1099 during the next year’s tax affairs? If so, it’s likely that the contractor didn’t respond or just laughed at your face. After all, who wants to pay the tax?
If this sounds like you, here are some tips. As part of your rehab contract, be sure to have your contractor fill out Form W-9. This form contains the signature and all relevant information that may be required when issuing 1099.
If you find that you do not need to issue 1099 to this contractor, keeping a record of this W-9 will help you protect it for future audits.
Related: Who needs 1099?
Don’t forget the retirement fund
If you have a flipping business and you (and your spouse) are the only full-time employees, consider setting up SoloK to direct taxes to your retirement account. ..
Donations you make can reduce both state and federal income taxes, even if you are self-employed. Depending on the net profit from your flipping activities, you can put more than $ 50,000 per person per year into your SoloK account to significantly reduce taxes.
The best part of all this is that the money in your severance account can be used for other real estate transactions. If you are paying 12% to a private lender to fund your rehab, consider using your severance pay as a private lender in someone else’s transaction to generate a high interest income. .. Keep in mind that your retirement money cannot be invested in transactions that you already own or are actively participating in.
One of the most common mistakes I make many times is an investor who is too busy running a flip business to take the time needed to care for the financial well-being of the business.
Remember, it’s not about how much money you make, but how much money you keep, so you’re doing what you can to keep your earnings more Take the time to make sure that.
What are some of the things you do to protect your money while repairing or flipping a house?
Please leave a comment below!