Important Note: This article is for informational purposes only, as PropStream does not offer tax or legal advice. We recommend consulting with a tax professional for assistance filing your taxes.
Did you earn any money from wholesaling last year? If so, it’s important to know how to file your taxes correctly before the upcoming deadline.
However, wholesaling real estate taxes aren’t always straightforward, so it’s a good idea to speak with a tax professional before filing your return. In the meantime, here are some tax basics and tips every real estate wholesaler should know.
Table of Contents
- What is Real Estate Wholesaling?
- Wholesale Real Estate Taxes 101
- 4 Tax Tips When Building Your Wholesale Business
What Is Real Estate Wholesaling?
To understand how wholesaling can impact your taxes, it’s helpful to know how this real estate strategy works.
Wholesaling is often seen as a great way for beginner investors to get started in real estate since it requires little to no upfront capital. Instead of earning rental income on a property they own—which can require a hefty down payment and regular mortgage payments—real estate wholesalers make money by getting a contract on a property below market value and then selling that contract to someone else for a higher price.
Often, wholesalers never actually own the property, or if they do, it’s only for a brief time. They act as a middle-person between the original seller and the final buyer, and their profit is often called an “assignment fee.” Let’s take a closer look at how that profit may impact your taxes.
Wholesale Real Estate Taxes 101
Wholesaling taxes typically differ from regular real estate investing taxes.
That’s because the IRS views wholesaling real estate as a business, even if you only treat it as a side hustle. Because of that, the IRS will typically tax your wholesaling income like regular business income, which means you’ll need to make sure you use the right tax forms for your annual return, make quarterly tax payments, and check which deductions you can take.
Tax Forms for Wholesalers
How you report your wholesaling profits on your annual tax return will depend on how you structure your business.
Some common business structures include:
- Sole proprietorship, an unincorporated business where the income passes directly to you
- Limited liability company (LLC), a legal entity that, as the name implies, limits your personal liability as the business owner
- Partnership, an unincorporated business with multiple owners
- S-Corporation, a type of tax election that allows company shareholders to take advantage of certain tax benefits
Depending on which structure you choose, here are some tax forms you may need as a wholesaler:
|Form||Who Uses It||Purpose|
|Schedule C (Form 1040)||Sole proprietors and single-member LLCs||To report your business income and expenses on your personal tax return|
|Form 1065||Partnerships or multi-member LLCs||To report your business income and expenses on your personal tax return|
|Form 1120-S||S-Corporations||To report your business income and expenses on your personal tax return|
|Form 1099||Any wholesaler who hires subcontractors||To report wages paid to independent subcontractors and vendors (if over $600)|
|W-2||S-Corporations or incorporated businesses with employees||To report wages and benefits paid to business employees (including yourself if you own an S-Corporation)|
Note about 1099s: Your attorney may give you a 1099 after each wholesaling deal that details your payment. But even if you don’t receive a 1099, you still need to report that income on your taxes. Be sure to consult with a tax advisor before reporting your wholesaling income.
Quarterly Tax Payments
Because the IRS counts wholesaling as self-employment, you’ll want to plan on paying estimated taxes throughout the year. If you don’t pay enough throughout the year, the IRS may charge you an underpayment penalty, so it’s a good idea to plan ahead so you can save enough each month. You can use Publication 505 to determine how much you need to pay each quarter.
Here are the due dates for quarterly estimated tax payments:
- April 15
- June 15
- September 15
- January 15 of the following year
Wholesaling Tax Deductions
Being classified as a business in the IRS’s eyes has pros and cons for wholesalers. The downside is that you don’t typically get the same tax advantages that many other real estate investors do. But the good news is that there are still ways to lessen your tax burden.
For example, you can reduce your taxes by deducting all eligible, business-related expenses from your income. Some deductions you may be able to take as a real estate wholesaler include:
- Marketing and advertising
- Business use of your car
- Business use of your cellphone
- Subcontractor or vendor costs
- Legal, accounting, and other professional services
- Business-related insurance
- Office rent or mortgage interest
- Professional memberships and subscriptions
Taxes for Different Types of Wholesaling
In general, there are two different ways to close a wholesaling deal. A double closing involves buying the property and quickly selling to another buyer. In this case, you officially own the property for a very brief time—typically anywhere from a couple of hours to a few weeks. Assigning a contract, on the other hand, involves selling the contract itself so that you never actually own the property.
There can be some confusion regarding how taxes work with these two types of deals. Generally speaking, whether you do a double closing or assign a contract, the IRS views your revenue as business income. The only difference is that you may pay closing costs twice and perhaps property taxes with a double closing.
4 Tax Tips When Building Your Wholesaling Business
To avoid trouble with the IRS, it’s a good idea to stay on top of your taxes as you grow your wholesaling business. Hiring a tax professional early on can help you prepare for taxes throughout the year. Here are a few tips they may recommend.
1. Keep Track of Your Expenses
Be sure to track all your business-related expenses and keep your receipts.
This includes everything you purchase for your wholesaling business, even if it’s not tax deductible. You can do this either with paper records or a digital bookkeeping system. What matters most is that the information is organized and easy to access. The IRS recommends holding on to your financial records for at least three years.
2. Set Aside Money for Taxes After Each Deal
Instead of scraping together money at the end of the year or before each quarterly tax payment, it’s a good idea to set aside money for taxes after each deal you close.
How much you should set aside depends on your income tax bracket, state and local tax rates, and your business’s legal structure. An accountant or CPA can help you determine what percentage of your earnings to put into your tax reserves.
3. Research Your Local Tax Rates
To know how much money to set aside, you’ll need to know how much your state, county, and city charge in income taxes (if they do). Local and state governments typically share this information on their public websites.
4. Structure Your Business With Taxes in Mind
Your business structure can impact how much you pay in taxes. For example, if you report your income as a sole proprietor, LLC, or partnership, all your income minus deductions are subject to a self-employment tax of 15.3% on top of your regular income taxes.
However, as the owner of an S-Corporation, you’re also considered an employee, and you only pay self-employment taxes on your salary, not the additional distributions you receive.
For example, let’s say you make $75,000 in profit this year. Normally, you would have to pay regular income taxes plus self-employment taxes ($11,475) on that profit. However, as an S-Corporation, you might take $40,000 as a salary and $35,000 in distributions. This way, you would pay income taxes on the full $75,000 but pay self-employment taxes only on the $40,000 salary ($6,210), saving you $5,355.
There are limits to these savings, though. You can’t take all your profit as distributions to avoid paying self-employment taxes. Instead, the IRS requires you to pay yourself a reasonable salary.
Knowing these tax basics can help set you up for success as you grow your wholesaling business. But remember, taxes can vary based on your personal financial situation and other real estate investments you have, so make sure to consult with a tax professional and an attorney throughout the year to get the best results.