Tax Implications Of Real Estate Investing

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest
Share on google
Google+
tax implications real estate investing thumbnail

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.

Sponsored


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.

Sponsored

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

You’ll pay 0% of your net profit in capital gains tax.

You’ll pay 15% of your net profit in capital gains tax.

You’ll pay 20% of your net profit in capital gains tax.

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.

Sponsored

Short-Term Capital Gains Tax

Quick flips (my bread and butter) are accessed a short-term capital gains tax which is essentially just calculated by adding any profit to your income.

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).

Summary

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.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest
Share on google
Google+
Jeffrey Poston

Jeffrey Poston

Jeffrey Poston is the Project Developer for the Poston Investment Collective, LLC. He is an investor, syndicator, developer and international best-selling author. He has over 40 years of experience in engineering, real estate investing and development — including multi-million dollar R&D construction projects.

Recommended For You

SPONSORED LINKS

At times, OPMWebinar.com may link to products and services outside our website. These are always products and services we have used or use on a regular basis and trust enough to recommend them to you.

OPMWebinar.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and sharing links to Amazon.com. As part of this Amazon Associates program, OPMWebinar.com will post customized links, to track the referrals to Amazon. This program utilizes cookies to track visits for the purposes of assigning commission on these sales. As an Amazon Associate I earn from qualifying purchases. Amazon and the Amazon logo are trademarks of Amazon.com, Inc. or its affiliates.

OPMWebinar.com also includes other affiliate links. If you click through any of these links, at no additional cost to you, I will earn a small commission if you make a purchase.

OPM SECRETS for today's remodeling professional — FREE WEBINAR SERIES

Save time & money on your investment projects by attending this FREE investor’s webinar series including case studies, lender tricks and how to manage multiple investors.