In addition to paying taxes at regular income tax rates, real estate agents are exposed to taxes on self-employment. Self-employment tax applies to your net earnings. Currently, the self-employment tax rate is 15.3%. At the state level, dealers will also be exposed to state income tax.
In general, moving houses is treated as income for the person or entity that is “changing the house”. So the simple answer is no. If you decide to get involved in home investment as a source of income, you must understand the tax implications of exchanging a home. The long-term capital gains tax that applies to the exchange of homes owned for more than one year ranges from.
Most middle class taxpayers expect to pay a 15% tax rate on long-term capital gains. This is much less than what home sellers must pay if they pay taxes as merchants. Why does it matter? There are many tax consequences, but mainly, the focus is on the characterization of property. Dealerships, like other business owners, purchase inventory, not capital assets.
When the change is complete, the income is reported like any other business on a tax return. For non-corporate taxpayers, that means it appears in Schedule C and taxes apply to self-employment. But it also means that related costs are deductible as business expenses, even if they result in a loss. FICA taxes are social security, Medicare and Medicaid taxes.
If you work for 9 to 5 days, 7.65% of these taxes are deducted for each paycheck. Your employer pays another 7.65% on your behalf. Make the total amount due for FICA taxes 15.3%. Anyone classified as self-employed or self-employed in a business, which most home-lovers are, even if they also have a day job, must endure the blow of paying the total 15.3% for themselves.
So the total tax potential for a short-term gain ranges from 25.3% to 52.3%. That said, if you only sell one, maybe two homes a year, your accountant may argue that you're not in business and should be classified as a merchant for tax purposes. There are also different types of capital gains taxes depending on the time it takes to sell the property when you change a house, which are taxes on short-term capital gains and taxes on long-term capital gains. This is ideal for real estate investors looking to invest their income to buy great deals and earn higher profits.
In addition to federal income taxes and FICA taxes, housing investors must also pay state and local income taxes on their profits. For real estate investors, that means being able to defer taxes by taking the profits from one investment and investing them in another. An approximate method for calculating your home exchange taxes is to multiply your normal income tax rate by the taxable profit you've earned. Whether you're trying a “do it yourself” route and setting up a spreadsheet for your records, using real estate investment software, or accounting or bookkeeping software, make sure you do something to keep an accurate record of your transfers.
Fix and Flip investors can deduct certain expenses before their property is renovated, while some deductions can only be made after the project has been successfully completed and sold. At the end of the day, don't let taxes scare you from moving house if you haven't done it before; there are still plenty of opportunities to make a profit. If the property is held for less than 12 months, the investment gains do not receive any preferential treatment. As a dealer, the total tax consequence of an investment can range from 25.3% to 52.3%, depending on your tax bracket.
You can buy and sell properties without a license, but that strategy may increase your potential tax liabilities. While it's hard to avoid the basic consideration of investing as active income, there are some special cases that can help you change a property and not be subject to ordinary income tax. There are many ways to get information about taxes when you change a home, and you can search Google for an excellent resource that will help you learn about the types of taxes you can expect to pay. Understanding how tax rules work and capital gains that change homes is the first step to making filing taxes less intimidating.