TAX Questions ?
We just sold our 1st rehab propety 
.
I have kept all receipts, miles, closing cost and payments in a notebook all arranged by date (each on a seprate page). I have logged all of this in a spreadsheet. SO now I have all of my expenses totaled up.
So I take my Purchase price + expenses - selling price = Net Profit. Ex. 76,000 + 15,000 - 99,000 = $8,000 net Profit. The capital Gains tax will be on the $8,000, is this correct? (I held the property for less than a year)
Also, I have heard I need to do a seperate spreadsheet with all the materials I purchased and the cost. and make a seperate column witht the taxes I paid. Someone told me I need to firgure out what taxes I paid on the material, so I can deduct this on my taxes. Is this true, because I don't totally understand it. I thought you can only deduct your expenses to lower your Capital Gains Tax.
Can a tax expert please help me on this.
I will be looking for a CPA in my area, but thought I could get some advise for now.
Thanks for all of your help.
ncrehaber
You are right in a nutshell except that you will not be taxed capital gains tax. That is only for properties held over one year. What you do have is ordinary income, that if purchased in your own name, gets reported on a schedule C.
You will want to separate out the "cost of goods sold" and business expenses separtly. For example, the cost of a 2X4 goes into cost of goods sold but the classified advertising is simply a business expense.
Assuming your figures above (76+15-99=8k profit), that $8000 will be taxed at your ordinary income rate. In addition if you must report your activities on a schedule E (verses form 1120s in an s-corporation) you will also be subject to a 15.3% self employment tax.
The good news is that you only have to worry about this if you make money. People complain about taxes but if you don't make anything you don't have to worry about it. You are actually in a good situation now but it is definatly time for some future planning (s-corp??).
GOOD LUCK
And remember, my advise is as a layman and not as an attorney or accoutant. Always seek the help of competent professionals.
What would be the result if he had a S-Corp or LLC? How would it affect his tax rates?[ Edited by egbenj on Date 07/09/2004 ]
ncrehaber,
Quote:Can a tax expert please help me on this. If by "tax expert" you are referring to a licensed tax professional such as a tax attorney or paid tax preparer, then this site does not have one I am aware of.
Dave T has answered your question and similar questions in this forum and his answer agrees with myfrogger on all points but one. Dave T has said that when you are in the business of rehab-flips, your holding period is irrelevant. Even if your rehab took a long time and you sold more than one year after purchase, your profit is still reported on your Schedule C as ordinary income.
Dave T also warns that along with the ordinary income tax on your Schedule C profits, you will also calculate self-employment income taxes on Schedule SE.
The best answer anyone on this site can give you is to consult your own professional tax advisor.