CG Taxes/Normal Taxes/Dealer Status?
I'm a little confused as to how CG taxes, Normal Taxes and Dealer status work.
Are CG's taxed at a higher rate than "normal" income? How does dealer status play into the equation?
If I were to setup an RLT which would take title to all prop's, can I then just sell my interest in the RLT? (As opposed to actually taking title in his/her own name or company name).
How will that affect the tax situation? Will my buyer have a problem getting a mortgage to cash me out?
TIA
Also--is it difficult/expensive to setup an RLT?
TIA Again.
Does anyone have any ideas?
Doni--
Bad news. Your land trust to avoid income taxes isn't going to fly. The IRS doesn't care how you hold title, if you make money they are going to want their piece. How big their piece depends on these other issues.
The most common Cap. Gains rate is 15%. But of course it is much more complicated than that. No matter what tax bracket you are in, however, the CG rate is lower than your base rate.
Dealer rate is essentially the same as your "normal" rate and is the rate you should be paying on your current "flip" profits.
I was afraid of that--but it was a thought.
So does that mean that ALL properties purchased, rehabbed and sold will be subject to the "Base" tax rate as you call it?
Assuming that's a YES, then here's my understanding of what I've been told here. Can someone please confirm that I understand?
I just want to make sure that I understand the tax implications of any deals I do--I want to account for them in making sure that I make a profit (even after taxes).
Anyway my understanding is this:
ALL Real Estate that is sold and was not the owner's primary residence during two out of the previous five years will be subject to Cap Gains taxes.
Except in such cases where the seller has been tagged with "Dealership Status". In that case, profits from said RE sales are subject to the BASE tax rate as opposed to Cap Gains tax rate.
You noted that flipped properties would be subj to base tax rate. What about properties that have been held as rentals?
One clarification to JeffreyAdam's post. The 121 exemption for a primary residence is not automatically prorated if the property is held less than 24 months. You must own and live in the property as your primary residence for 24 months out of the last 60 months. If you sell short of the 24 months you would be taxed on the entire amount UNLESS you fall within one of the exceptions that would allow a prorated exemption such as medical issues, forced relocation by employer/layoff, etc.
[addsig]