Transcription
What is up guys? Zach in here, Rick in here, and in today's video we're going to give you a complete explanation of taxes and wholesaling real estate. Yeah, yeah guys, we get asked all the time, you know, "How do you explain taxes for wholesaling real estate? What are they? Do I have to pay this percent of taxes? What percent taxes? Tax structures?" This is going to be the ultimate breakdown for taxes and wholesaling real estate. Just know, me and Rick, we are not lawyers, CPAs, tax professionals. Did I mention that? Being said, we're not realtors or anything. We are just giving our honest advice as wholesalers on our opinions on taxes for wholesaling real estate. So I'm really excited to break it down and excited to share it.
So before we get into it guys, remember you need to smash that like button and subscribe, get the most free value from us, and let's get into it. I think a lot of people starting out get really confused with the whole process of, "Is wholesaling taxable income? Is it capital gains tax? All this stuff." So if you can give a brief explanation of taxes with wholesaling real estate, especially as a beginner. Okay, so understanding—I'm not a CPA or a lawyer—so, so a lot of people confuse this stuff, it's actually really, really simple. So taxes—yes, you have to pay them. Wholesaling is not this unique structure that you avoid paying taxes. The IRS regulates this, and everybody in the United States is subject to paying their taxes. It's income, correct? Income, correct.
So simply put, when you flip a property—basically we're specifically talking about assignments—your assignment fee. So say you did three deals, say you're in 10 grand a deal, that's 30,000. Okay, okay? That is basically reported as income. Okay. Yes, you can minus off your expenses. There's a lot of debate on how to do it, but you're going to take that 30,000 and basically you're going to—either some of you guys do your taxes yourself, which that's fine; some of you work with a CPA and an accountant—you simply give them those numbers, and then it's going to translate to your taxes, and you're going to pay whatever your tax bracket is. It's not complicated. So basically, wholesaling real estate is taxable income.
So let me give you a quick example. Quick example. Let's say, for example, I bought a scratch-off lotto ticket for five dollars. You know, I'm 18 years old, right? And I win 5,000. Wow, awesome. You might be asking like, "Do I have to pay taxes on that?" Oh yeah, like when you redeem it instantly, you're gonna have to pay taxes on it, especially here in the state of Florida, too. So you're gonna pay tax on that. That, that is literally the same thing as if I spent five dollars on bandit signs or spent five dollars on marketing, and I get a—and then I get a check from a title company for five thousand dollars. Guess what? I'm gonna have to pay taxes on that. Title companies usually get a 1099 sometimes, so they're gonna report you to the IRS that you made five thousand dollars, so the title company doesn't get in trouble. Exactly.
So you understand that. Understand that literally for wholesaling real estate, what it boils down to is you're just getting checks, and it's technically the title company that gives you the check. Really, we all—we know if you have a property under contract for 100, you sell it to a cash buyer for 110, you make 10 grand. Grand. The 110 from the cash prize is going to pay 110 at closing, 100 to the seller, 10 to you. So you're gonna get ten thousand dollars in a check; you're gonna have to pay taxes for it. So let's kind of go over the tiers of it. Tier one. Tier one. Sometimes you have a different philosophy with it, but we are on the same page here. It is best if you're starting out to have an LLC, but remember you don't need an LLC. An LLC will protect you if you just have no money at all. You don't need it. Just understand there may be is a risk with an LLC. The benefit of an LLC is if the deal goes away, you get sued, or whatever, you're personally protected. But if you're broke, really it's not the biggest deal in the world, right? Like, like you got no money in your name. And sometimes I see when people—maybe you have a unique situation, you have to do a contract right then and there, you don't have an LLC. LLC. Long as you guys have an assignable contract, which is what we teach, you can actually assign that to the LLC before you even do your assignment. So don't feel like you're stuck, guys. An LLC typically is anywhere from a hundred to three hundred dollars to set up, depending on what state you're in. Yeah, so if you don't have the money, you don't have to. Again, we will tell you to be the most protected, of course, pay for it, but if you're broke, you don't have to.
Uh, the next part is, so you're going up the tax bracket, of course, you have state income tax, you have to pay federal income tax. Also, not a lot of people understand this—this gets me like—it's this gets my blood boiling. I know it gets your blood boiling. If you have an LLC or you do it in your personal name, you're going to pay self-employment tax, which stinks. You're used to your salary job, what, you're paying 7.65? Uh, self-employment's 15.3. That's social security, 12.4, and I believe—I don't know, it's on something—it's double. At the end of the day, it's 15.3 percent you're gonna have to pay on top of federal, even state. Word. Florida, no state income tax, which is great, but you got federal income tax. So remember that's not good. That's why many people, once they get a wholesaling business going—this was me when I started out—usually I give a rule of thumb: if you're under about 400k, a single person, it's probably best to not have a C corporation. We'll get to that, guys. Look this stuff up yourself, but most people, if you're making over 50k a year, you should really consider an S corporation. An S corporation is—you're basically like an LLC, the best way I—I can say it—and you don't have to really pay that 15.3 percent. 15.3 percent. Obviously, you're making over 100k, a tax person you—you're gonna pay for will definitely just tell you this stuff, and they'll help you out with it. I'm a little crazy person when I started out. I created the S corporation myself. I filed everything, everything. I—I—I don't really have to do my taxes too much because, I mean, it's pretty simple the way I do it. Of course, we pay for accountants now. Just—it saves us a bunch of money. But starting out, you have to pay anyone to do it. But just remember, my personal opinion, if you're a single person—now married, obviously a little different, obviously do your own tax calculations—but calculations—but if you're making above 50k, and this is like going to be a full-time, you have consistent money coming in, definitely you should think of an S corporation. Corporation. As of today, you can take a 199a deduction and get 20% off your revenue. You can just deduct with an S corporation, so it's absolutely amazing to make under 157,000. Now the new administration, that might change that, but as of this video, you're fine. Next here is, you're making over 400, a C corporation's probably gonna be your best bet. It's a little more expensive, a lot more hassle. You got to pay yourself a salary, like a reporting, reporting. You got 40, 940 ones. It's kind of a mess, but once you're making 400, you can pay someone to really help you out with this. But at the end of the day, just gotta understand, I think for most people an LLC is going to be really good because you can write off your expenses. So you spend 3k in marketing, you can write that off your income. So pretty important stuff, but just understand which entity to be doing it, it's really depend on how much money you're making and how consistent you are.
So you guys understand there's a lot of terminology to be throwing around here, and honestly, when I heard all this the first time—first time—I was confused for years. And if you're confused, the video. So let me break this down. Down. If you form an entity like an LLC, you do it at your state level. Yes, you just file papers. Doing a lot—it's actually very, very—you don't have to go pay 500 bucks for somebody to do it for you. Okay. Uh, there's a lot of states that have all the kits and everything into it. I'm not going to get into the nitty-gritty of it. Then, once you do that, register for your tax ID number. This is the part where the IRS wants you to declare if you're a C corporation or an S corporation or an LLC or an LLC. This is called an EIN. And I don't want to like confuse everyone. Correct. But there's the understanding, there's a state level, and then there's a federal level. So for the most part, what we're telling you is, I like an LLC because it's straightforward, and it washes through your personal taxes, and set it up as an S corporation. That's how I would start out today. The beauty of this system is as you grow and change, you can change designations, you can change your structure if you see it fit. But for the most part, guys, you got to pay your taxes. There's no way around it. No. And at some point we need to talk about people saying, "Well, when do you pay your taxes?" Because when I had a regular W-2 paycheck—paycheck—they just took it out. Yeah, as wholesalers, let me share to you, you don't pay your taxes on each deal. You can choose to, but what happens is when you go to file your taxes—either you do it yourself, you work with an account—and they go, "Listen, you have—you owe X amount in taxes." By the way, I'm one of the rare few to tell you, you want to owe taxes. It means you actually made money; you were very profitable. You don't want like such a skimpy deal. And then you have to be disciplined to set money aside to pay your taxes. Um, either—either typically going to be paying in March. Um, you can get an extension, you don't really need it. And you've got to be disciplined. You do not want to get in trouble where you make all this money and then you forgot to allocate money to pay your taxes. So my recommendation is take a chunk of it, set it aside. Everybody's number's different. I would say a general like idea is for most people, I'd rather you save enough for taxes than not enough, because everyone's in wholesaling—it's like you can get a big deal in one month, and then three months you get no deal. I would say for most people, I would say if you're working a regular nine-to-five job also—you're gonna kill me for saying this—but that's—I would say about 25%, you keep it just in case. That can be good for two things: first of all, to pay your taxes, and also it's an emergency account in cash if you need it. Um, I just think it's better to be in a situation where you can pay your taxes versus, "Oh shoot, it's March, I owe 25k, I don't have that in my bank account." In my personal opinion, I know you're like this too, the stress of that—it's just—it's not worth it, right? I agree. So it's—you got to set the money aside, consider your tax liability, and set it aside. So if you—you make a 10,000 deal, set aside 2,500 bucks. It's like really simple. The idea is hopefully you have a surplus, you have some great accounting strategies, but if you guys forget about it, say you do like 30 deals, you're all this money moving around, it's like, then you go to your company because like, "Well, you owe X amount," you're like, "Well, that's a lot of money." Yeah, so you've got to set it aside. Yes, you can offset it by doing other things with it, but that's not what this video is about. No, I—no, I—guys, go to YouTube, like that's how I learned a lot of the stuff. I'm not going to tell you how to do IRAs, how to—like this is not the channel for that. But if you're a wholesaler coming in, save some money for taxes. I'm telling you, like we have a good chunk of our money just in a bank account for taxes. Yeah, it just—the IRS—the IRS, they are worse than—yeah, you do not want to deal with it. Stop. I'm not gonna say anything bad about the IRS, please don't. I'm just telling you, you have to pay your taxes. Unfortunately, there's no way around it. I know people do the depreciation game; that's all fun and games until you just keep—keep kicking—you keep kicking the can until you owe it. When it's more of an advanced strategy, so we're just talking about like when you get started out, the best recommendation is if you can have set up an entity, it really doesn't cost a lot of money, and you don't need technically a lawyer to do it. Now, maintaining that entity, entire different conversation. To get up and started, an LLC and S corporation, the net passes through to your personal taxes, and set aside 25 percent at least, and then hopefully you—less—it's a surplus. Surplus. Take your family out to dinner, nice vacation, and keep moving on. Because I was a W-2 employee, yeah, and we're so used to everything being pulled out, and I thought it was really cool when I got a refund. I like doing it kind of the other way around, where I know what my tax liability is, I've got more than enough money set aside, I pay it. When you don't have the money, that's when the stress comes in your life, and I don't need you chasing deals to pay your taxes. Every deal should stand on its own. That's it.
So guys, at the end of the day, pay your taxes. It's pretty important for you to do, and just understand, guys, the one last thing I think a lot of beginners might not know, but remember your tax bracket's not like, "Hey, it's 32% if it's 150," that means if you make your 151 dollar, all the taxes are 31%. It's a sliding scale, so every dollar above that is—just look up how taxes work. It—when I started out when I was 17, I got stressed out because I thought it owed 30% on taxes, but it really effectively it was like 22%. Guys, just look it up. You can do deductions, all that stuff, but go to YouTube, there's people way more qualified than us. But for wholesaling real estate—real estate—save some money and tax. At the end of the day, that income is money you have to pay—pay. But at the end of the day, it's your money, so go out there and look up how to do taxes the right way. Always do a professional. You can still do it yourself; that's how I do them in the first couple years, uh, but at the end of the day—the day—it's ultimately up to you what you want to do with your money with the taxes, but just pay them. Don't get you guys in trouble. Trouble. Definitely. Yeah. So guys, I really appreciate it. If you're liking the content here on the channel, please smash that like button and subscribe, and we'll see you soon. Have a blessed one. Thanks, guys. This is Zakin signing out, Rick in signing out. Have a great one.