How to Account for Flip House Taxes
When investing and flipping real estate, significant increases in profit may occur. Profit that results when real estate is flipped is called a capital gains tax and must be claimed on income taxes. Plan to pay capital gains taxes by doing adequate research and talking with a certified public accountant.
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Instructions
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Create a log of your real estate transactions. Include investment properties you have owned for multiple years and recent additions to your list. Capital gains taxes will be significantly higher on properties you have owned less than a year. "Hold an asset for a year or less and you'll face short-term gains that are taxed at ordinary income-tax rates. This could be as high as 35 percent," explains Bankrate.com. Holding onto a property longer could reduce taxes to as little as 15 percent.
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Talk to a certified public accountant to determine whether your real estate flipping is considered a series of investments or whether you will be categorized as a dealer-broker. If the IRS views your real estate flips as a function of an ongoing business, taxes will be high regardless of how long you hold onto your property. "The IRS is out looking for these transactions," says Bankrate.com. "If the IRS decides your investment is a business, that what you're doing is to earn a living, the property changes from a capital asset to a means of producing income that's subject to ordinary tax rates, plus the additional burden of another 15.3 percent in self-employment taxes."
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Plan your investment strategy to determine your desired tax bracket. Decide how much you are willing to pay in taxes over all and build your decision on whether to flip on this fact. For example, you might decide to flip two homes and hold three as rental properties for the year rather than flip all five of your investment properties.
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Tips & Warnings
A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price, explains Investopedia.com, and may be claimed on your income taxes as well.
Make sure you have maintained an adequate record of business expenses related to your real estate transaction in case you want to write off additional tax liabilities.
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