Tax Issues of Flipping Houses
Flipping houses is a way to make quick profits in the real estate market. House flipping describes buying a home, making renovations and selling the home at a higher price. Renovations made by house flippers can include fixing existing damage, adding rooms and upgrading appliances. While buying and selling homes can be lucrative, there are several tax issues that can reduce the profitably of flipping houses.
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Property Taxes
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When you buy a home, you must pay real estate taxes on the home. Real estate taxes are charged on every home you own, so if you buy several investment properties with the intent to flip them, you will have to pay taxes on them while you own them. If you cannot find a buyer for a renovated property as quickly as you expect, you will end up absorbing the cost of the property taxes.
Capital Gains Taxes
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Capital gains taxes are taxes you must pay if you sell an asset at a profit. Capital gains taxes apply to all kinds of assets such as real estate, stocks and collectibles. House flippers often try to buy, renovate and sell homes as quickly as possible. While this can minimize property taxes, it can result in large capital gains taxes. The short-term capital gains tax rate is equal to your normal income tax rate and applies to capital gains realized from the sale of assets you hold for less than one year. In other words, if you flip a home in less than a year's time, the profits will be subject to the short-term capital gains rate, which can be as high as 35 percent. According to Bankrate.com, the long-term capital gains are usually taxed at a rate of 15 percent.
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Mortgage Interest
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The Internal Revenue Service (IRS) allows taxpayers to deduct the interest paid on home mortgages from their income tax returns for a first and second home. If you own several investment properties in addition to your primary residence, you will only be able to deduct the mortgage interest on two of your properties.
Considerations
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The government allows homeowners a significant exemption from the capital gains tax when selling a primary residence. According to Bankrate.com, single taxpayers are granted $250,000 in tax-free profits for the sale of a primary residence, and this exemption only applies if you have lived in a residence for at least two of the past five years.
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