Flipping Houses Taxes

Flipping Houses Taxes | Tax Consequences

Real estate investors love to talk about the money that they make on deals, but most are not real open to talking about the tax liabilities of those deals.  I would like to preface any further discussion about flipping houses taxes by stating that you should hire a good accountant to assist you with the tax consequences of any deals that you do.  When selecting an accountant I would also suggest that you find one that has experience with doing taxes for real estate investors, and preferably one that has real estate investment experience themselves (if it were a perfect world).

Flipping Houses Taxes | Is it an investment or a profession?

Even if you only do real estate flipping part-time the IRS could see your investment business as your profession.  If the Internal Revenue Service decides that your house flipping business instead of an investment, then the type of tax liability will change from a short term capital gain to ordinary income and also include another 15.3% in self-employment taxes.  This typically will happen if you are selling too many properties too quickly in the eyes of the IRS, this is subject to the IRS’ opinion and could be as little as 2 or 3 flips a year.

Flipping Houses Taxes | The 1031 Exchange

When we talk about flipping houses taxes most investors think of the 1031 exchange.  Section 1031 of the IRS tax code provides a tax-free exchange, a “like-kind” exchange, of a business or investment property and then defer your capital-gains taxes.  If you sell a property and then immediately reinvest the gains made from the sale into a similar piece of property, then you can defer the tax liability on the gains made from the sale until you sell the new property, unless you do another 1031 exchange.

Two big mistakes that investors, new and old, make with a 1031 exchange are that they don’t declare the sale of the property as being a part of a 1031 exchange before they sell the property; and they don’t pay attention to the strict deadlines set forth by the IRS for identifying a property to purchase, 45 days, and closing on that property, 180 days.  I cannot stress enough the importance of speaking with a good accountant when evaluating the tax liabilities associated with flipping houses taxes.

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