If you flip houses for profit, be aware you probably are a real estate dealer and not an investor. This means you:1. Treat all buying and selling expenses of houses as ordinary business expenses.2. Treat all proceeds as business income3. Are not subject to the $3000 capital loss deduction rule, but can deduct losses against ordinary income (and losses in excess of income can be carried back of forward as net operating losses).4. Have to pay self employment tax on your net profit.5. Can’t take long term income as capital gains.6. Can’t use the installment method to record income from property sales.7. Can’t take depreciation on property to be flipped.8. Can’t use sec 1031 to defer gain in a like-kind exchange.The key is to know whether being a dealer will be an advantage or a disadvantage. This will take some planning with your tax preparer (me for instance).
Brian’s Tax Musings
Remember if you have an S Corporation that you as owner are also an employee and must pay yourself a reasonable salary. One sure way for the corporate return to get a second look from the IRS is to have nothing on the ‘officer salary’ deduction line on the return. It is wise to always pay yourself some salary out of the coporation and pay payroll taxes. If the IRS looks closely at the return they may determine that much of the profit that isn’t subject to self employment taxes should be wages and subject to payroll taxes. It is always wise to pay all shareholders a reasonable wage out of the S Corp.
Brian’s Tax Musings
There is a way to pay employees for meals when working over time as a tax free fringe benefit plus get a full deduction for your company. Plus this does not exclude the owner-employee from this fringe. To qualify for this the payment has to:1) Be occasional2) Enable the extension of the workday to include overtime3) Enable the employee to work overtimeIf these items are not met, the money becomes taxable compensation and must go on the employee’s W2.We can explore this further if you like.