Flipping houses can be extraordinarily profitable, which is one of the reasons why it’s a popular real estate investment strategy.
You go in with a competitive bid, invest some funds making repairs and sprucing up the place, and then sell. It’s rewarding, and when done well, it can be extremely lucrative.
And while many people know about the potential expenses and risks that come with the actual acquisition, remodeling, and sale of house flipping, some investors are surprised to learn about the taxes involved.
In this guide, we’ll discuss everything you need to know about house flipping taxes, including what to expect, when you’ll pay, and the types of tax you can expect to incur.
Understanding Tax Implications of House Flipping
Real estate is a capital asset, so profits from home purchases are taxed under capital gains rules when investors purchase a property and do not live in it as their primary residence.
There are two types of capital gains tax: short term and long term.
Short-term capital gains taxes are taxed the same as your income tax rate and are for profits on real estate that are held for under a year.
Long-term capital gains taxes are for assets held over a year and are charged at more favorable rates (which may range from 0% to 20%, depending on the bracket your profit falls into).
If charged a capital gains tax, buyers will typically be experiencing short-term capital gains tax, since flippers are often motivated to flip and sell quickly to maximize profit.
That said, individuals who purchase and remodel real estate for profit on a regular basis—aka house flippers—are classified as “dealers” rather than “investors” by the IRS. Investors typically hold properties for longer, like purchasing a property and renting it out for income for several years.
Because flippers are often considered “dealers” and not “investors,” they often do not pay capital gains taxes. The properties are…