Capital Gains Taxes
I recently bought and sold several lots in Florida, some were sold within a matter of days after I purchased them. I know that as short term capital gains that all my profit is considered regular income and taxed as such. After reading several posts I am wondering if I am subject to self-employment taxes as well.
Jay
Who owned the lots? You, a corporation, llc?
Sounds to me as if your sales were dealer dispositions and therefore eligable for both SE tax and taxable at your current income tax rate. Consider forming an S-corp if you plan on doing this a lot. Talk with an accountant.
My wife and I owned the property in our names. I have already filed and paid income tax on our income but was unaware of the possibility of self-employment taxes. [ Edited by jaychardon on Date 05/06/2005 ]
The IRS will say that you bought and sold as a dealer...even if you only do one deal. Therefore, you would be subject to SE tax and regular income tax. You have two ways to avoid the full SE tax (notice I said full as there is no way to fully avoid it):
1) Set up an S-corp. After paying yourself a reasonable salary (which includes SE tax), you can take the rest of the money out as profit and only pay your regular income tax.
2) Make over 90,000 a year. Pay the SE tax. After that, SE tax drops to 2.9%. Not only do I recommend this one...I am also a member.
Thanks for the info. Having already filed my income tax, should I amend my return to include selfemployment taxes or just wait for the IRS to make a correction?
I fully agree with bluford. Get an accountant who knows what he is doing with REI. I keep my own records and fill out my own forms. I use my CPA to "proofread" the forms before I send them in. Saves money.
Thanks for all of the constructive input
The Treasury Regulations require that you have the INTENT to HOLD the property for rental, investment or use in your business. It seems pretty clear that you have the intent to hold for SALE rather than rental or investment, and as such you would be precluded from completing a 1031 exchange transaction.
[addsig]
flyboy,
I was not clear in what I wrote which you quoted. In my example I was building the structure to rent or lease space in. You are absolutely correct in your complaint that this is an extremely grey area. I was reading old posts a while ago and ran into a guy who was claiming that he flipped properties in 1031 exchanges and that he had been audited several times to no avail.
I give that example to show how some people abuse the law and how easily it can be done. Let me also point out that he was banking on the auditors being ignorant of the law because they have not focused their attention on 1031 exchanges.
Like I said in a previous post, tax law is not about the nuance but the interpreatation of grey areas. It can be a real pain.
Hope that helps.
The CD may be a safer route than a lease option. I assume that your concern is that one of your years of residency will drop off the calendar before ownership is transferred. I have done only one CD and this was some time ago. I was the purchaser on that one. My understanding that all essential rights and responsibilities of ownership were transferred to me at the time the CD was in effect. I was paying RE taxes and depreciating the property. My sense is that you will be OK with a CD, but you should get more definitive opinions.
In a lease option, a taxable sale does not occur until the option is exercised.
In a contract for deed, an installment sale has occurred on the date specified in the contract for when the buyer assumes all the rights of occupancy and ownership -- usually the day the buyer gets the keys.