How To Flip Your Property & Not Pay Hefty Taxes
If you’re flipping property, you should know about taxes on short-term capital gains. The amount you make is taxed the same way you would if you sold a business. Depending on your tax bracket, you can pay anywhere from 10% to 37% on short-term capital gains. Long-term capital gains, however, are taxable at a lower rate of 0% to 20%, depending on your filing status.
The rates for capital gains vary depending on the type of property, and the time you sold it. Generally, if you sold your property last year, your tax rate will be 0%. But if you sold a property that had been vacant for over a year, your tax rate will be higher. In addition, you may also need to pay state capital gains taxes, and in some states, you may need to pay a tax called the Net Investment Income Tax (NIIT).
Buying low and selling higher
One of the most important strategies to profit in real estate investing is buying low and selling higher. This strategy aims to buy a property for a low price, fix it up, and then sell it for a higher price. The key is to do this quickly to minimize the risk of losing capital. One way to accomplish this is to follow the 70 percent rule, which says that you should pay no more than 70 percent of a property’s after-repair value.
While flipping houses can be lucrative, it can also be tax-prohibitive. Investors can take advantage of the 1031 Exchange tax-saving method. This plan allows them to defer capital gains taxes by purchasing a similar property using profits from the first property.
Avoiding dealer classification
When flipping property, it’s essential to avoid the dealer classification. This status is a liability, and real estate investors must be aware of the negative consequences. For example, you’ll have to pay 15.3% self-employment taxes on any rental real estate. The good news is that there are several ways to avoid this problem.
By not being a dealer, you can defer taxes on your profits from selling investment properties. In addition, avoiding dealer classification allows you to use your money to pay for investment necessities. For example, you can use the proceeds of a real estate flip to purchase down payment funds for long-term investment keepers or to pay for preventive maintenance and operations. You can easily avoid this problem by planning with dealer-avoidance strategies. But you must beware of shoddy advisers, or you may end up in a situation where you can’t avoid dealer classification.
Financing
You can make a lot of money flipping property and only need a little down payment. After fixing up the property and selling it quickly, you can reap huge profits. However, most promoters of this idea do not tell you the taxes you will have to pay. This is because selling an investment property differs from selling a primary residence.
One way to fund your flip project is by taking out a personal loan. This type of loan is usually short-term and comes from a private lender. Many investors choose this option because it doesn’t require excellent credit and income. Also, these loans can be obtained quickly and easily. The lender will examine the equity in the property and whether it can be flipped for profit.
Staging
When selling your home, one of the most common mistakes is underestimating the cost of home staging. Staging is costly but, if done correctly, can increase the price of your home by five to ten percent. Whether or not you stage your home depends on what your goals are. A home staging strategy can range from simply decluttering to removing all the furniture and bringing rented pieces. The more staging you do, the faster you can sell your home and get a higher price.
One way to save money on staging is to use a professional. A home stager will help you make the most of your photographs and improve your overall appearance. A home stager will also point out any maintenance issues and suggest the best places to place furnishings and other items. Home staging services will also identify difficult spaces to sell and can be improved through creative styling.