Flipping houses may be an attractive way to make money. Taking a distressed house, making repairs and putting it back on the market seems easy enough, especially when you have a penchant for craftsmanship or a good relationship with a contractor. Nevertheless, as much money as you think you will make flipping houses, always remember that Uncle Sam will want his cut.
This post will highlight the tax implications of flipping a house.
There are two important considerations to be aware of when renovating property: how long you hold the property and whether it is considered an investment, as opposed to a business. If you fix the property and sell it in less than one year, the profits from the transaction are likely to be considered a short-term capital gain that will be taxed at ordinary income tax rates.
These rates are likely to be much higher than those assigned for long-term capital gains, which are generally reserved for the sale of a family home after a number of years. Short-term capital gains can be taxed at nearly 39 percent, depending on your income bracket, whereas long-term gains max out at 20 percent for high income earners.
Of course, these rates may also be affected if the federal government considers your income to be from a business as opposed to an investment. Business income from flipping houses may be subject to self-employment taxes in addition to income taxes. However, these could be tempered by corporate income tax brackets.
Ultimately, when calculating whether a renovation project will be profitable, it is important to understand the tax implications. An experienced tax attorney can advise you.