The following is an excerpt from the Home Study Course, “Trump Tax Plan Strategies: 20% Income Deduction for Real Estate. This is offered as part of the twice monthly coaching program. For more information, please visit: https://www.ustaxaid.com/coaching-program/
“If you fix n flip, wholesale or otherwise buy real estate simply to resell it for a profit, then you have a business. For purposes of this property, you are a real estate dealer.
The “real estate dealer” label often puzzles people. YOU aren’t a real estate dealer; the particular property qualifies as a real estate dealer property. So, it is possible to have one property that is “real estate dealer; property” and another that isn’t.
There are 3 main issues with the real estate dealer status:
#1: There is self-employment tax on the income you make. Flipping burgers or flipping houses, both are businesses and that means you’ve got self-employment tax of 15.3% unless you operate in the right business structure.
#2: When you sell it, the gain is taxed at ordinary tax rates. It is not taxed as capital gains.
#3: If you sell with “owner financing”, you have to pay tax on all of the gain from the sale even if you haven’t received the money yet.
If you sell a property that had been a rental, there is no self-employment tax, the gain is taxed as capital gains and you can carry it and take the installment sales tax treatment. That means that you won’t have to pay tax on the gain you haven’t yet received payment for.
Real estate dealer properties will have QBI (qualified business income, which means you may be able to take a 20% income deduction). The rental properties, on the other hand, will have QBI if there is income during the time you hold them. However, when you sell, the gain will not be QBI.
There is a lot to consider these days. Does it make sense to try to avoid the real estate dealer status? Maybe it’s not as important as in the past.”
In fact, in the next few examples in the Home Study Course, it turns out the ordinary income from a sale ends up as less than 1% more in tax than capital gain. That’s due to the Medicare Tax surtax on the capital gains and the 20% deduction for ordinary income made in a pass-through entity..
But, of course, you have to deal with self-employment tax of 15.3% and the lack of the installment sale tax treatment. The latter is a big deal. If you sell with seller financing and that property qualifies you as a real estate dealer, you have to pay tax on the gain even if you haven’t collected the money.
There are ways around both of these issues. That’s the kind of thing we talk about in coaching. I hope you can join us soon!
The link for more information is: https://www.ustaxaid.com/coaching-program/