The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: NatalieMarie on January 09, 2018, 01:49:03 PM
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Hi, so I’ve got a question on capital gains tax. This year we bought and sold a house that my husband remodeled (flipped it). We owned it less than a year so it’s considered short term capital gain. So the internet tells me the profit is taxed as “ordinary income”. My husband is self employed and made around 85k this year. I’m trying to estimate how much we are going to owe because I need to pay our last installment of quarterly estimated taxes (late, I know, it was supposed to be paid in dec). So I know to do approx 15% of the self employment income for self employment taxes. And then for the rest, do I add the profit off the flip house (20k) to the 85k and count our income as 105k? And calculate how much we owe from there?
Hope this makes sense. Thanks.
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A short term gain on the sale of an asset (like real estate or stocks) would not be subject to self employment tax.
I could see there being issues with this being considered a form of self employment rather than a short term capital gain, but I have no idea where that line would be. This might get you started: https://www.pscpa.com/house-flipping-business-investment/
Edit: This seems like a more complete exploration of the topic: https://www.therealestatecpa.com/2017/09/21/flips-subject-self-employment-taxes/. Sounds like it's up for interpretation, but they offer some semi-clear guidance.
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Fourth quarter estimated taxes aren't due until January 16th, 2018, so you're not late.
As @terran said, though the short term capital gains may be taxed at the marginal rate of ordinary income, they are not actually taxed as ordinary income (meaning you don't pay payroll/FICA taxes on them for sure!). Given that, you can probably avoid accounting for that gain until your original return due date.
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If the purpose of the house purchase was to flip and resell, then unfortunately, the IRS categorizes this as self employment with its associated 15.3% tax.
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Edit: This seems like a more complete exploration of the topic: https://www.therealestatecpa.com/2017/09/21/flips-subject-self-employment-taxes/. Sounds like it's up for interpretation, but they offer some semi-clear guidance.
I believe that article has some bad (or at a minimum, confusing) advice in that once you hit the FICA threshold for the year, only the employee portion of FICA goes away entirely. Employer portion is capped per-employer, meaning if you work a W-2 "day" job that pays you exactly the FICA capped salary, the employee and that "day job" employer each pay the maximum amount of FICA withholdings.
If that employee then has a side real estate business which is classified as subject to payroll taxes, that new employer will still need to make FICA contributions (as will the employee need withholdings) up to the cap though the employee will be refunded those excess employee contributions at the end of the year tax time.