How Much Tax Do You Pay When You Flip a House?

Flipping a house, or buying a house for a low price and then reselling it shortly thereafter for a profit, comes with several tax ramifications. How much tax you pay when you flip a house is based on the purchase price, the length of time you own it before reselling it and how much money you invest in refurbishing the house before the sale. Other factors to take into consideration are whether you live in the house during the time you own it and if you use a real estate professional to help in the eventual sale of the property.

Buying an Investment Property

House flipping is a form of real estate investment. The investment strategy is to purchase a house that is priced under-market or is otherwise distressed, such as a short-sale or a bank-owned foreclosure. The investor often restores the house, or adds value in some other way, such as making it visually more appealing with landscaping, new paint or fixtures.

Capital Gains Tax

Real estate is considered a capital asset, and as such, a capital gains tax is assessed on the income that results from the sale of a house. According to the Internal Revenue Service, when you sell a capital asset, the monetary difference between the price you paid for the house and the amount you sold it for is your capital gain. For example, if you buy a house for $200,000 and sell it for $250,000, your taxable capital gain is $50,000.The IRS notes that for 2010, the maximum capital gains tax rate for most people was 15 percent. Investors in the 10 and 15 percent tax brackets may qualify for zero capital gains, depending on their overall income figures.

Exclusion for Primary Residence

If you live in the house for at least two years before flipping it, you can typically exclude capital gains of up to $250,000, or $500,000 if filing jointly. You may use this exclusion once every two years. In each instance, the home being sold must have been your primary residence for at least two of the preceding five years.

Short-term Capital Gains

If you sell a house less than one year after acquiring it, the capital gains you realize from the sale of the property are taxed as regular income, which could be as high as 35 percent, depending on which income bracket you fall into.

Tax Deductions

All of the improvements an investor makes to a property before flipping it are tax deductible. If you list a house through a realtor, the costs associated with advertising the property and paying a commission are tax deductible as well. Maintaining receipts and invoices for all costs associated with improving and selling the property will help you reduce your capital gains tax burden.

References

• U.S. Internal Revenue Service: Publication 530 - Main Content
• U.S. Internal Revenue Service: Ten Important Facts About Capital Gains and Losses
• U.S. Internal Revenue Service: Topic 409 - Capital Gains and Losses
• U.S. Internal Revenue Service: Property
• U.S. Internal Revenue Service: Reporting Capital Gains