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Short sale buy and flip to OO

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Have some tax questions regarding my first deal. I got a call from my direct mailings, ended up doing a short sale. This is my first deal and the numbers arent great, but I learned a lot. I ended up purchasing the property for 80K. Closed on it yesterday. Turns out I will be able to get a 110K appraisal (unlike what I was thinking MC).

 

I found a buyer yesterday as well that is approved for 95% of the 110K. Im only looking to net about 100K and is what I was asking on an ouright purchase. These people have some credit issues and can not come up with the down payment or closing costs. So the mortgage broker will up the price to 110K and forgive the downpayment and Ill be responsible for closing costs. 5% down = 5500, closing costs should not be above 5K. Im in the state of nebraska.

 

So the way I understand it, Ill be responsible for capital gains at a 20% rate because Im re-selling in under 1 years time, as well as income taxes.

 

Heres my questions. First, I know Ill owe capital gains taxes on the 110 sale price - the 80K purchase price, or 30K. that comes to 6K. However Im not sure how income taxes come into the equation. I of course have expenses involved (5500 closing costs on purchase, utilities bills, mileage, advertising, closing costs on the resale at 5000, totalling approx. $11, 300). Do I get taxed twice on the same money? Once as capital gains and again as income? Thats not how it works is it?? Im completely niave on tax issues so any help would be greatly appreciated!

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Ji Woslager,

 

First, let's compute your profit on this deal, then figure out how it will be taxed. Your

  • net sale price = contract sale price - seller concessions - selling costs
     
    or, according to your latest information,
     
    net sale price = $110K - ($5500 + $5000) - $0= $99500

For your deal, the

  • cost of goods sold = contract purchase price + closing costs + holding costs + marketing costs
     
    or, according to your information,
     
    cost of goods sold = $80000 + $5500 + (holding costs + marketing costs) = $86300

This brings us to your profit computation. Let's use this formula

  • Profit = net sale price - cost of goods sold = $99500 - $86300 = $13200.

If I assume that you did this in your own name as a sole proprietor, your profit will be taxed as ordinary self employment income at your marginal tax rate. Let's say your marginal tax rate is 25%. The self-employment income taxes take another 15.3%. Now, you can estimate your federal income tax bite on this deal at about 40%, or $5280. In actual practice, the tax bite will be even less because you get a business credit for half of the self employment income taxes (payroll taxes).

 

Note that capital gains tax rates don't apply to your situation. Currently, there is no marginal tax bracket or capital gains rate equal to 20%. You should also note that you either pay ordinary income taxes or capital gains taxes, but not both on the same income.

 

If your state has a state income tax, then that tax liability is added to what we already discussed for your federal income tax liability.

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Ji Woslager,

 

First, let's compute your profit on this deal, then figure out how it will be taxed. Your

  • net sale price = contract sale price - seller concessions - selling costs
     
    or, according to your latest information,
     
    net sale price = $110K - ($5500 + $5000) - $0= $99500

For your deal, the

  • cost of goods sold = contract purchase price + closing costs + holding costs + marketing costs
     
    or, according to your information,
     
    cost of goods sold = $80000 + $5500 + (holding costs + marketing costs) = $86300

This brings us to your profit computation. Let's use this formula

  • Profit = net sale price - cost of goods sold = $99500 - $86300 = $13200.

If I assume that you did this in your own name as a sole proprietor, your profit will be taxed as ordinary self employment income at your marginal tax rate. Let's say your marginal tax rate is 25%. The self-employment income taxes take another 15.3%. Now, you can estimate your federal income tax bite on this deal at about 40%, or $5280. In actual practice, the tax bite will be even less because you get a business credit for half of the self employment income taxes (payroll taxes).

 

Note that capital gains tax rates don't apply to your situation. Currently, there is no marginal tax bracket or capital gains rate equal to 20%. You should also note that you either pay ordinary income taxes or capital gains taxes, but not both on the same income.

 

If your state has a state income tax, then that tax liability is added to what we already discussed for your federal income tax liability.

 

 

Interesting, thanks so much!!

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