Forums **Ask A Question** Tax Question-Is this really as bad as it looks?

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  • #22884
    Ben Crapo
    Post count: 22

    Good Evening,

    I am in the final stages before sending out my first mailer and am trying to calculate estimated short term capital gains based on 10, 20, 30, and 40 transactions with fairly consistent profit margins (estimating buy at 20%/sell at 60% of market value). If the numbers I am looking at are correct, then there is a large chunk of change to be paid in taxes which will slow my growth. The first question is can I claim profits as business income as an individual as opposed to capital gains when buying and selling land? With short term capital gains being taxed at the same rate as normal income at the federal level (not to mention adding on the state capital gains tax), I have a few questions:

    1. What are some strategies to mitigate the amount of capital gains taxes paid?
    2. At what point do you stop rolling all profits back into mailers and purchase funds to avoid paying this tax? (I believe there is a 45 day window to roll profits back into the business, correct me if I am wrong)
    3. Does someone have a system they would be willing to share that has worked for them (lessen taxes but still able to “pay yourself” early on)?

    Ultimately I am trying to do this without taking on a large tax burden at the end of the year if there is a way to avoid it. I apologize if this question has already been answered. Thanks in advance for the help.

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  • Shawn Swisher
    Post count: 56

    My advice… just send the dang mailer! At some point you will need to contact a CPA for tax advice but right now the first priority is to just get the train moving out of the station. Focus on acquiring property, then focus on getting it sold as quickly as possible.

    I’m not a CPA but I’ll try to answer some of your questions anyway (this is not tax advice):

    1. For federal income taxes, anything held less than one year will be a short-term capital gain and will be taxed at your regular income tax rate. To get the lower long-term capital gain tax rate, you would need to hold it longer than a year. You’ll want to be turning your inventory over several times per year so holding a property longer than a year isn’t a viable option. To mitigate state income taxes you can simply focus on buying land in states that have no capital gains taxes.

    2. I’m not aware of any 45 day window to roll profits back into the business. For income tax purposes, you pay taxes on your gross income for the year less your expenses.

    3. After you get started and discuss your situation with a good CPA, you’ll want to start putting back a percentage of your profits from each sale and earmark those for taxes. Your CPA will likely have you start paying estimated taxes each quarter. These will be adjusted upwards as your income grows.

    It’s good that you’re thinking about income taxes but don’t let it keep you from sending that mailer. This is the type of thing that can cause analysis paralysis. I know this from personal experience! Get the train moving, make some money and then schedule a consultation with a good CPA after the money starts rolling in. Good luck!

    "Buy land, they're not making it anymore." -Mark Twain
    Wali Ali
    Post count: 8

    I can’t put it better than Shawn. Focus on sending the mail. get some deals. Keep good documentation of all expenses and income. As years go by, you’ll figure out some tax loop holes and calibrate your business accordingly.

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