Today’s first speaker was Chala Mohr from Coldwell Banker in Denver, Colorado. Chala talked to us today about house flipping and way right now she is not flipping any homes. She did this by using an example of a low-priced home in Denver and walked us through the margins needed to make flipping profitable. Chala had worked out a scenario with a house currently on the market for 219,000.00. First you have to add in either the acquisition cost, buying it from a wholesaler, for 5000.00 or hard money lending costs from about 4,000.00 to 8,000.00, then add in the mortgage for the time that one will be holding for the flip. In this scenario, Chala figures about a 10-week flip, so add in another 8,760.00 for the mortgage and 600.00 for the utilities. The next step is to add in the renovation budget for this house, keep in mind the square footage on the property is 730, an average budget that includes new kitchen, bath and flooring along with some minor cosmetic fixes would be around 30,000.00. This is where a flipper must think about those additional costs that can be a surprise – such as a new roof-5,000.00-8,000.00, foundation issues-up to 10,000.00, sewer line-4,000.00 to 8,000.00 or furnace, water heater or air conditioner 6,000.00-10,000.00, any one of these could blow the budget on a flip. The last part of a flip that also includes money is the sale, for that one has to add in agent fees of 6%, if the house sells for 296,000.00 – that would be 17,760.00 and on top of that there are the taxes 264.83, title at 1000.00 and miscellaneous fees for around 790.00. The total all in costs for this flip will be 291,174.83 with the current market value of 296,000.00 – so that would work out to 4825.17 for 10-weeks of hard work. However, if just one of the surprises pops up the flip could end up with a 5174.83 loss. If the house could sell for up to 350,000.00, the commission fees would move up to 21,000.00 and the best-case scenario would be 55,825.17. But once again if the just in case budget is spent, the gross profit amount could be lowered to 22,825.17. There are other items that could sink the budget on a flip especially when the house is older than ten years old, you may need to replace windows, gutters, replace electrical or plumbing. These are all important items to look at when looking for a house to flip.
So if you are looking for a house to flip and need someone to help you determine if it will work or just looking for your forever home give Chala Mohr a call!
Chala Mohr * Coldwell Banker * 720.341.9001 * Chala.Mohr@ColoradoHomes.com * www.RealEstateWithChala.com
Our second speaker today was Kay Cruson, our accountant and Enrolled Agent. Today Kay talked to us about self-employment tax. When a person works for an employer, their taxes are taken out by the employer. What are Self-employment Taxes? Self-employment taxes are taxes paid by self-employed business owners to the Social Security Administration for Social Security and Medicare, based on earnings from a business one owns – not a corporation. The self-employment tax is also called “SECA” tax for the Self-Employed Contributions Act. The tax rate for self-employment income is 15.3% for Social Security and Medicare and is based on the net earnings of the business. The maximum Social Security earnings are set each year; if your Social Security tax exceeds the maximum, no Social Security tax is imposed on the amount over the maximum. Medicare tax is imposed on all net earnings, with no maximum. There is also an additional Medicare tax imposed on higher-income individuals, after they reach a specific income level. For most employees, they are only required to pay half of these taxes and their employers pay the other half, while business owners pay the entire tax amount. However, business owners may take half the tax off their personal income tax return, to reduce their adjusted gross income. Keep in mind that those self-employed business owners must pay self-employment taxes, composed of Social Security and Medicare taxes, including the additional Medicare tax, if applicable. And, of course, self-employed people also pay income taxes on the profits from their self-employment.
What are Employment Taxes?
• FICA taxes (Social Security and Medicare taxes), based on the employee’s income, are shared by the employee and employer. Each pays 7.65%, up to a total of 15.3%. The same Social Security maximum amount applies to FICA taxes. And the additional Medicare tax applies to the Medicare portion of this tax.
• Federal income taxes, which are withheld from employee wages and sent to the IRS by the employer.
• Federal Unemployment (FUTA) tax, which is paid by the employer to provide unemployment benefits to employees. Self-employed individuals don’t pay unemployment taxes, and they can’t collect unemployment benefits.
But, what if you are both self-employed and an employee? Do you have to pay the maximum on both self-employment tax and employment tax? Well, yes and no. You must pay income tax on income from all sources, including both self-employment income and employment income. You will have to pay both self-employment tax (SECA) for Social Security and Medicare, and also your employer must collect FICA taxes from your wages. But there is a maximum on the Social Security tax,
In general, FICA taxes from employment are considered first, and if the Social Security maximum has not been reached, self-employment taxes are included. So, in conclusion Kay lets us know that except for federal unemployment benefits, both self-employed individuals and employees pay the same taxes – federal income taxes and taxes for Social Security and Medicare. If you need an Enrolled Agent or accountant that knows her way around the IRS and taxes give Kay Cruson a call!
Kay Cruson * Accounting & Tax * 303.937.3468 * firstname.lastname@example.org