LandInvestors.com Forums **Ask A Question** What I learned about taxes in the land business

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    Bret Lorenson
    Participant
    Post count: 24

    April 18th was a tough day this year…. After going thru my first full tax year being in the land business in 2016 I learned a lot and thought I would share my thoughts and tips. First of all, I have been investing in rental properties for about 10 years, So I am pretty familiar with tax code, deductions, etc. and do my own taxes every year. So with rental property investing I was used to showing very little profit on paper at the end of the year due to depreciation and other deductions that would lower my tax liability. On the other hand, with land you have very little tax shelter for your profits, other than actual expenses incurred, and to make matters worse you pay self employment tax (15.3%) on your profits, which you do not on rental property profits as they are considered a passive investment, not earned income.

    The land business is awesome and you can make a lot of money, you just need to plan for your tax liabilities on what you make and not stick your head in the sand so that come April 15th you are prepared to pay the piper. Here are my suggestions.

    1. Put away a portion of your profits from every sale for taxes. I would suggest having a separate account just for taxes, and put away maybe 1/3 of your profits into this account and don’t touch it…. unless a really good deal comes along and you need some acquisition funds. Just kidding, or maybe not…If you have 20k sitting in your “tax” account and a deal comes across your desk that you cant pass up then maybe you temporarily tap into your tax funds to fund the deal. I would only do this if I knew I could get in and out of deal quickly and replenish my tax account.
    2. Document ALL your expenses meticulously so that you can lower your tax liability. Little things like recording fees, notary fees, overnight delivery fees, postage, back taxes, HOA fees, etc are easy to overlook and forget to document. But these fees add up and could significantly lower your tax liability for each land sale.
    3. Pay your taxes quarterly as estimated taxes. Anyone who is self employed is aware of estimated tax payments, and they are actually required if you make a certain amount of money in the year. If you don’t make quarterly estimated payments you will be subject to a penalty come April 15th. It’s not a huge penalty, mine was about $100 this year for underpayment of my estimated tax liabilities. Spreading your tax burden over 4 smaller quarterly payments instead of one lump sum on April 15th also takes some of the sting out of paying the ransom payment, the government calls taxes.

    I am not a CPA, so this is just my opinion. Hope it helps your tax planning strategy for next year.

Viewing 15 replies - 1 through 15 (of 31 total)
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  • Kevin Farrell
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    Post count: 1198
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    Bret – Thanks for sharing the tax information with us.

    Brian A
    Participant
    Post count: 21
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    Bret your post was very helpful I really appreciate the detail as it will help me put aside a ballpark number away come April 15th.

    Milan
    Participant
    Post count: 530

    Thank you Bret! Very helpful!

    Are you operating as a sole proprietor or are you LLC.

    Thanks again!

    Bret Lorenson
    Participant
    Post count: 24
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    Milan, I operate as an LLC. Sole proprietors and LLC’s are the same for tax purposes. The only difference is the liability protection the LLC offers. In my opinion the best entity for land flipping in the S-Corp as it will allow you to avoid the self employment tax on some of your land flipping profits, and I may be switching to that this year. It depends on on how much volume/profits you have during the year. Fortunately you can make that election/choice on Dec. 31st for the whole previous year if it makes sense for you.

    Fred
    Participant
    Post count: 10

    Hi Bret, thank you for the details concerning taxes. I just started making some small land purchases and have wondered if the purchasing and selling of raw land can be handled one of two ways for tax purposes. Possibly only one approach applies to raw land (thoughts on this are greatly appreciated!):
    1. Buy and sell parcels as if you are keeping inventory. For this approach, the profits are taxed at a relatively high rate. Also, with this approach, for one parcel, it may be an expense during one year when it is bought and then there is the gross sale reported possibly in the next year. Or maybe one can wait until the year it is sold to report both. I think it depends on the type of accounting method used. I have not had much experience with this approach since I had a rental house previously.
    2. Each parcel is thought of as an investment so when it is purchased, you keep track of the cost basis similar to a stock purchase and then when it is sold, the sale price, cost basis, etc. are reported. With this approach, I think it is considered a capital gain and the capital gain is taxed at a lower rate than it would be for approach number 1.

    I would be very interested in hearing if either of these approaches is ok, if so, what are the pros and cons, or if only one applies to land investing.

    Dave Ayres
    Participant
    Post count: 21
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    Brett sounds like you know this already but will mention anyway. My accountant who also formed our LLC filed federal form #2553 which requests the LLC be taxed under the Subchapter S Code (S-corp). In our state (Missouri) when the federal government acknowledges our LLC as an S-Corp the state automatically does as well simply because the federal did. Of course you’ll want to verify with your state.

    Milan
    Participant
    Post count: 530

    Great info here gentlemen! Thank you all!

    I piled up bunch of term deals. How do you tax those? Let’s say you bought for $4000 and payments are $250 per month.

    My simple brain tells me, that I don’t have to worry about paying taxes untill my cost, in this case $4000 is met. Am I correct here? Or not really? How do you guys tax tetm deals?

    Michael Aillon
    Participant
    Post count: 292
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    Good stuff here guys. What are you using to keep track of this stuff? Quickbooks? Xero? I’m just getting through my first deals so I need to stop for a minute and get into the mode of keeping good records.

    Daniel Bear
    Participant
    Post count: 44
    Pro

    Michael,

    I signed on with Xero a few months ago and I love it! They are a New Zealand based company with outstanding support, any questions that you have about their software will be answered in detail super fast. Yes, this is an additional ~$15 a month but it makes my life easier when it comes to taxes and tracking my money.

    Daniel

    Bret Lorenson
    Participant
    Post count: 24
    Pro

    Fred, I operate closely to option 2 you indicated. Your sales are treated as short term capital gains and taxed as ordinary income, unless you hold for over a year.

    Bret Lorenson
    Participant
    Post count: 24
    Pro

    Milan, I recognize the sale as when I get the cash. So on terms deals spread out over multiple tax years I recognize the gain only on the portion received that tax year. This can be a benefit to terms deals as it may spread the gain over multiple years and might even change the short term vs. long term gain taxation.

    Milan
    Participant
    Post count: 530

    You learn every day something in this business! That is a very smart way to do terms Bret. Thank you!

    Milan
    Participant
    Post count: 530

    TAXES, TAXES, TAXES!!!!! Lets open this topic again guys.

    I am having nightmares about this and it is only September. Who want’s to slash his profits by up to 40 percent self employment taxes included on land deals?

    You muscle trough and made finally some money in land deal, lets say $5000. Now if you’re in a high tax bracket, the uncle sam will take $2000 for it. And you have few deals like that. Yes profit is nice, but tax bill is pretty high too.

    Share your strategies for land business taxes. How to minimize them? How to not pay them at all?

    Best business formation regarding taxes.

    Any Recommendations for accountant that understands land business or general real estate business?

    I know, very boring topic and it was discussed already from few angles. But I sure as hell don’t seem to understand any of it.

    Share some tips guys please!

    Rod Hall
    Participant
    Post count: 300
    Pro

    I do a complete tax return in September every year. That is when I pay in more Quarterly Estimated tax. It is a discouraging thing to go thru but I don’t like the sticker shock in April. I also try to buy anything the business needs and maximize expenses. I am in the early planning stages of setting up an S Corp or a C Corp. If I am careful I may be able to receive some of the profit as a dividend and protect it from the 15% SE tax.

    Milan
    Participant
    Post count: 530

    Thanks Rod! It seams like a great strategy!

    Keep it coming guys! Any other tax strategies?

    Lets learn together!

    I have one:

    Apparently Sir Al Capone would never be punished for all the evil he did, if he paid his taxes. But the federal government couldn’t swallow the tax bill he owed. They apparently didn’t care much what he did, but they were really pissed of for him not paying the taxes.

    I heard he could just claim on front page form 1040 – other income, line 21 on his tax return.

    If you do that, there is no payroll tax or self employment tax.

    Could we potentially use that strategy too in land business for couple years?

Viewing 15 replies - 1 through 15 (of 31 total)

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