House Flipping Tax Information

House flipping can come with a large tax bill.

When a real estate investor purchases a property and rehabilitates or remodels it for resale at a later point, it is commonly referred to as "house flipping." While there can be substantial amounts of money to be made flipping homes, the income tax bill can detract from the earnings.

Types

Investors who flip homes as a business and as their primary source of income pay tax not only on the sale of the flip (capital gains tax) but also pay self-employment tax. This can mean a tax liability of 35 to 50 percent on all earnings.

Time Frame

Capital gains taxes can decrease if the investor holds on to a property for more than one year. Typically, investment properties sold prior to the one-year mark have a 35 percent tax upon sale, whereas properties that the investor owns for more than one year have a 15 percent tax at the time of the sale.

Deductions

While the tax bill can be high for property flippers, keeping good records and itemizing deductions for the home improvements, contractors and the cost of keeping the property, such as property taxes and mortgage payments, can offset a large tax penalty from the IRS.

References

• Yahoo Finance: Tax Consequences of Flipping Real Estate
• Doghouse to Dollhouse: House Flipping Taxes
• Bankrate.com: Tax Consequences for Flipping Real Estate