When it comes to taxes, things can get pretty complex. If you’re like me, with multiple income streams, things tend to get even more complicated.
My advice has always been that if you aren’t already, you should talk to a tax professional who can help you understand what kind of affect your investment decisions will have.
Believe me, tax codes are changing all the time and a tax professional gets paid to help you steer clear of any potential problems.
Being Taxed On Rental Income
You probably already know that you have to pay taxes on rental income. That means if you collected $20,000 in rent in 2018, you’ll have to include that on your tax return.
What you might not know is that if you made any repairs to the properties, you can deduct the cost — and lower your taxable income.
Now, you can’t deduct improvements (room additions, interior decorating) but you can deduct maintenance and upkeep costs.
Let’s look at an example. Say you have an apartment building — and a tenant on the bottom floor called about a leaking ceiling. 72 hours later you pay $2,000 to Bob the contractor for a new section of plumbing and a new ceiling in the kitchen.
You could deduct that $2,000 from the rent you collected ($20,000) and then you’ll only be taxed on $18,000.
Capital Gains Tax
This won’t typically be an issue for the average house-flipper. To pay capital gains tax you need to own the house for a minimum of one year.
But be mindful because I’ve had to hold on to properties for a lot longer than originally planned (to wait out a recession, for example).
If you bought a fixer-upper for $50,000 and sold it 3 months later for $115,000 — that’s a $65,000 profit. No sweat if you did a quick flip but what if you had the house for a year before selling?
Well, now you’ll have to pay capital gains tax on that $65,000.
DEDUCTIONS: If you’re paying capital gains tax you’ll be able to deduct what you paid in real estate commissions when the house sold.
You’ll also pay on a sliding scale based on your tax bracket.
Click Your Tax Bracket
Here’s why this matters so much.
Let’s say you’re in the 24% tax bracket.
If you spent $30,000 on renovations, that leaves you with $35,000 in profit. The real estate agents will devour $6,900, bringing you to $28,100.
As far as your tax return goes, you’re going to have to fork over $9,750 (15%) of your profit (almost 1/3).
Painful, I know. But don’t worry, you’ll pay tax on a quick flip, too. Keep reading to find out how much.
Short-Term Capital Gains Tax
If your income for the year was $75,000 (the 22% tax bracket), plus you made $28,100 in profit (from the example above), you simply add the two up and your new annual income is $103,100 (which would move you to the 24% bracket).
As you can see, lots of factors come into play so always make sure you consult with a professional tax adviser to see how your investments will affect your specific situation.