Hey, everyone.
Today we're going to talk about rentals first, doing flips.
Well, we're going to discover today is that rentals have a lot of advantages
that flipping does not have.
So today we're going to look at the four big differences
between rental real estate and flips and why are these important
and the impact that they can make to your overall tax liability?
So the first one we're going to talk about today
is the capital versus ordinary treatment.
So let's talk about the downsides first.
If you're doing flips, is your main business.
And sure, you're generating some of these bigger profits quicker.
Well, because you're holding on for under a year and because you're
probably really considered to be treating real estate
as more of inventory than an asset that is really generating income
and you're you're holding it out for sale, you're going to get ordinary
income treatment.
And that means that you're paying a higher tax rate than you would
otherwise if you can push it into the capital gain treatment.
So if you're selling flips, you're here in the ordinary world where you want to be
as in the capital world, if you can, from a tax perspective.
So capital gains is for assets that are held for more than a year, rental
real estate being one of those assets that qualify for this treatment.
So if you can hold real estate for at least a year,
rent it out, generate some of that cash flow during that time,
and then you decide it's time to sell for whatever reason.
Well, then you can get this
capital gain treatment, which is a lower preferential rate.
So that potentially actually increases
your pocket income and allows you to do more.
So to the extent you can, you want to generate
capital gains, and that's just the first reason why.
Rental real estate
would be better than a flipping business purely from a tax advantage.
The second reason that rental real estate is a huge
benefit is because you're taxed on your income.
And I'd also put in parentheses
potentially loss, not cash flow.
And so the concept here is that
when you're doing
a flip, you're really taxed on dollars you're bringing in.
Right?
So let's say you expand, however much 100,000
to buy something that needs to be fixed up.
You put in 20,000 after you've done the work, it's now worth 150.
So what's your profit, right?
You sell for 150.
You take off the 20. You put in repairs
hundred for the original cost and you have 30,000 a profit.
Well, that's what you're going to be taxed on.
However, rental real estate you don't necessarily
pay tax on your cashflow because one of the big differences
one of the advantages of real estate
is that you can take depreciation deductions,
which is something that we'll talk about in another video in more detail.
But essentially, depreciation is this fake deduction
that is essentially saying that the property is worth less from a tax
perspective does not necessarily correlate to the real economics
of what's happening.
So every year you're taking this depreciation deduction
while you're collecting rents, and so you can potentially either
show less income on your tax return than actual dollars
you're putting in your pocket, or in some instances when it works out.
In a perfect world, you can create a loss for tax purposes
and actually have positive income.
The third big difference is that on rental real estate,
you don't have self-employment income tax on that.
So self-employment income this is think of if you're self-employed,
you're not only paying your ordinary tax rate
for also paying this additional tax because you're self-employed.
If you're an employee,
then this is the part where the employer's
paying half and you're having half deducted from your paycheck.
Most income wage income is subject to self-employment,
but there's a specific exemption for rental.
Real estate is not subject to it.
So if you're generating a significant portion of your income
from rental real estate, you're likely not paying self-employment income tax.
Now, if you have a flip business, that's very different because
flipping and selling the assets is not specifically exempt from self-employment.
So if you're treating it as a business and this isn't an investment
and you're flipping on a regular basis,
you're not only paying this ordinary income tax rate,
but now we're going to go ahead and compound it
and going to pay the self-employment income tax.
So again, a huge advantage
to rental real estate just from one of these alone.
Combining all of them together is.
Just an incredible difference on the tax you'll pay.
So let's jump into the last one here, and this is this is a great,
great strategy for being able to increase
the size of your portfolio is essentially
you can refinance rental real estate tax free.
So instead of selling the property to pull your equity out
and then investing where you're paying tax on it
and then you have less to invest in the next project, you can instead
the values increased for whatever reason, you've increased rents.
Maybe you've done some improvements, or maybe the general market like it is now
is just on an up then, and you can refinance it
and pull some of that cash out where you're not going to be taxed
on the cash that you pull out.
And you can use it to invest in another property.
So this is a great tool to generate some of that cash flow,
but not pay tax on the income or loss necessarily.
So these are the great, you know, the big four advantages
of investing in rental real estate as opposed to a flip.
And I'm not saying don't do flips.
I'm just saying when you look at your business as a whole.
Taxes are a huge expense
and you want to consider everything when you're making business decisions.
So I look forward to seeing you all in the next video.