Tax Bracket and Property Sale

[DLuke11]

Good Morning, thank you for holding this event. I have quite a few complex questions based on our tax situation this year, hopefully it’s not too much for you to answer.

My wife and I file jointly and our gross income from both of our full time W-2 jobs combined will be roughly $80,000. That will put us in the 12% Fed tax bracket. However we bought an investment property, rehabbed it, and sold it for a profit within 5 months. Since it was a short term investment we have to pay capital gains at our normal income bracket on the profit. After all expenses and holding costs were deducted, we had a total profit of roughly $60,000. We also have another investment property we bought 4 months ago, we are in the process of rehabbing and plan to sell before year end. We expect to make around the same profit of $60,000 on that flip as well. With that in mind I have a few questions about our taxes for this year.

1. Will our tax bracket be increased to the next tear at 22% due to the sale of the investment properties? Our total income would be around $200,000 gross if the second flip house sells for a $60,000 profit. ($80k+$60k+$60k)

2. If so, will that also increase the amount we needed to withhold from our W-2 income? Since we had been in the 12% tax bracket we had our employers withhold only enough to cover the 12% taxes that would be due. However, now we are being moved up to a 22% bracket there is an increase of 10% that wasn’t withheld. Should we expect an additional 10% to be taxed on our $80,000 W-2 income when we file our taxes? (About $8,000)

[DLuke11]

Questions Continued...

3. Will we need to pay self employment taxes (15.3%) on the profit from the flips even though my wife and I both have full time W-2 jobs and the flips are something we did on the side?

4. If so, our total tax bill for the initial flip profit of $60,000 would be… 22% Fed + 8.75% State (OR) + 15.3% Self Employment = 46.05% Tax. Based on that we would owe $27,630 in tax and our profit after taxes would only be $32,370. Does that all seem correct? I want to be sure we are setting enough aside for the tax bill.

5. Are we able to put any of the pre tax profit into a retirement account with an investment brokerage and not have to pay taxes on that part? Example: profit of $60,000, we invest $15,000 (25%) into a retirement account. Now we only show a $45,000 profit that we will be taxed on.

6. Will I need to hire a CPA or go to a tax preparer for the above scenario or will I still be able to use and input all this with Turbo Tax?

On an unrelated note,

Are we able to claim depreciation for our personal home we own and live in? If so, how much can we deduct each year?

[LoriLeighEA · Accepted solution]

Hi DLuke11 - thanks for joining us today!

1. Yes, your tax bracket will increase because short-term capital gains were added to your income for the year and they are taxed as ordinary income.

2. You could either increase your withholdings on your W4 through your employer, or make an estimated payment to the IRS. Here is a link to assist you with that:  https://www.irs.gov/payments

Here is a great tax calculator tool to help you estimate your federal taxes for 2023: 

https://turbotax.intuit.com/tax-tools/calculators/w4/

3. It depends on whether you are "in the business" of flipping houses for a profit or if this "flip of a house" was just an investment property.  If you are in a business of flipping houses, then all aspects of the sale will be reported on form Schedule C, Profit or Loss From Business.  A net profit from a business reported on Schedule C is subject to self-employment taxes (for example Social Security and Medicare taxes) as well as the applicable income tax.

The distinction between a dealer and an investor is truly based on the facts and circumstances of each case. Usually a dealer who flips five or more properties and has substantial profits.

In contrast to Schedule C, if the house was an investment property, then its sale would be reported on Schedule D. 

Here is a helpful link for more detailed information:

https://blog.turbotax.intuit.com/self-employed/5-tax-implications-and-tips-if-you-flip-things-for-pr...

4. See tax calculator linked in answer #2. That will check your calculations. For Oregon, here is a tax calculator guide: https://www.oregon.gov/dor/programs/individuals/pages/calculator.aspx

5.  Traditional 401 IRAs can lower your tax liability by reducing your Adjusted Gross Income dollar-for-dollar.

Both of these links are excellent resources:

https://turbotax.intuit.com/tax-tips/investments-and-taxes/deductions-allowed-for-contributions-to-a...

https://turbotax.intuit.com/tax-tips/retirement/boost-your-retirement-savings/L3lryQHVz

6. TurboTax Premier can and does handle all of these things - either online or in our downloadable desktop version. 

7. No you cannot claim depreciation on your personal home. If you use a home office solely for the use of self employment income, that office portion of your house can be depreciated. See these links for further details:

https://turbotax.intuit.com/tax-tips/small-business-taxes/setting-up-a-home-office/L52go3hc0

https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/depreciation-recapture/depre....

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[DLuke11]

Thank you very much!