The Truth about Taxes and Your Fix and Flip Business

by |

During the past few months I have seen quite a few blogs, posts, and comments about how taxes are assessed on fix and flip properties. There seems to be a lot of confusion and conflicting information so I wanted to use my blog this week to focus on some of the basics of how fix and flip properties are treated for tax purposes.

To start off, it is important to note what exactly a fix and flip property is. If you are an investor who is in the business of purchasing properties, rehabbing them and then selling it quickly for a profit, then this may fall under the fix and flip definition. With a flipper, the intent of the investor is to buy, improve, and quickly sell a property or properties. In the eyes of the IRS, this is treated as an active business and has the same tax treatment as if you were in the business of buying and selling cars for a living.

The downside of flipping for tax purposes is that higher taxes are frequently associated with flipping income as compared to rental income. Here are a few of the major downsides tax-wise of flipping:

How to Analyze a Real Estate Deal

Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.

Click Here For Your Free eBook

1. No Capital Gains Treatment

If a  flipping transaction is considered active income, there is no long term capital gains tax treatment, even if you have owned the property longer than a year from the purchase date to the sale date.

2. No 1031 Exchange

When we own rentals, one of the greatest tax deferral techniques that we often use is the 1031 exchange. The 1031 exchange allows us to sell a property for a gain and defer the associated taxes, provided that we roll the funds into another investment property. However, since flipping is not considered an investment activity to begin with, there is no 1031 exchange that can be used with respect to flipping activities, even if all the proceeds were re-invested back into another flip.

3. Payroll or Self-Employment Taxes

If a flipping transaction is treated as an active income, it means that the person actively involved in the deal may also be subject to payroll or self-employment taxes. This is accrued by flippers the same way it is accrued by those who work a W-2 for a living or maybe a realtor who makes commissions income via a 1099. Fortunately, with the correct legal entity structures, a significant portion of the payroll/self-employment tax may be avoided.

Related: Investors Beware: 8 Warning Signs You May be Overpaying Your Taxes

What Can Be Done?

As you can see, there are quite a few tax pitfalls when a transaction is considered a flip. From a strategic planning perspective, it is important to clearly understand what defines a flip transaction and what can be done to avoid this designation.

Luckily for investors, the IRS does not have a strict set of guidelines to define what constitutes a flip transaction. For example, there is no court case that says “if you flip 3 or more properties then you are deemed to be a flipper and if you flip less than 3 properties you are ok”.  In fact, the Tax Courts make their determination on a property by property basis.

This means that one taxpayer can be deemed to be a flipper with respect to one property and not a flipper on other properties that he sells during the year. In fact, one taxpayer sold several properties in a particular year and of the handful that he sold, only 2 of them were deemed to be “flips” and the rest were allowed as investment properties eligible for the capital gains treatment.

If you are wondering how this could happen, the answer is simply that the determination of each transaction is based on its own set of facts and circumstances. One property may have a very different set of facts and circumstances from the next and in these cases, even if the investor is the same person, those two transactions can have very different tax treatments.

One of the most powerful facts that can work in your favor if you are looking to avoid the flipper designation is the word intent. What your intentions are with respect to a transaction can have a significant impact in terms of how much you pay in taxes.

Related: I Like Paying My Taxes (You Might, Too, After Reading This!)

For example, I had a client who purchased a property, rehabbed it, and sold it all within a 4 month period. On the face of it, this looks to be a flip transaction right? Well, not so fast.  For this particular taxpayer, his intent going into the property was actually to rehab it and hold it out as a long term rental.

In fact, even before the property was fully rehabbed, he already listed it for rent and people started to come by to view the property before it was ready. As luck would have it, one of the people who came to preview the property made an offer to purchase the property. Even though it was the taxpayer’s intent to keep it as a long term rental, this unanticipated offer to purchase it was too good to pass up and he decided to sell it right after the rehab was complete.

In this scenario, even though it was purchased, rehabbed, and sold in just a few short months, his intent with respect to this transaction was that of an investment and not of a flip and as such, he was able to get all the preferential tax treatments as an investment transaction. Since he ultimately decided to reinvest the proceeds back into another long term rental, he was able to use 1031 exchange to roll all the profit into the replacement rental property he later purchased and therefore paid zero tax the year this first unit was sold.

As with most things in taxes, the law can often be complex. Sometimes the complexities work to your advantage and other times it takes a little more digging into.

Do you have any stories where you had a big win with taxes?

Be sure to leave your comments below!

About Author

Amanda Han

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 years with a focus on long-term hold residential and multi-family assets across multiple states. Formerly a tax advisor at the prestigious accounting firm Deloitte in the Lead Tax Group, focusing on tax strategies for the real estate industry and high net worth individuals, and at an international Fortune 500 Company in the high-tech industry in the Corporate Tax department, Amanda’s goal is to help investors with strategies designed to supercharge their wealth building. Amanda’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s best seller list. A frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies, Amanda has been featured in prominent publications including Money Magazine,, and Amanda was a speaker at Talks at Google and is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.


  1. Isaias Arroyo on

    Great article Amanda, I always enjoy your articles.
    It’s great that your client at least has the evidence to to back up his intent.
    That’s not always the case, I always remind my clients of how nice the IRS is when you show up to an audit with no proof. They get the point…

  2. Hi Amanda,
    Thanks for contributing this blog post, it’s very helpful. When I flip houses I normally designate the proceeds as self-employment income. However, this year I ran into a different situation: I bought a house with the intention of rehabbing it but ended up selling it to a developer without making any improvements to the property. Could the net proceeds from this be categorized as investment income? And can I add the fixed costs associated with holding the property for four months to the cost basis?
    I’d love to hear what you have to say on this one. Thanks!

    • Hi Jessica-sounds like this was more of a wholesale deal since you didnt make any improvements? How it is treated depends on your intent…so if intent was for it to be a wholesale/flip then it will still be treated as such. However if the intent was for it to be a rental and you got an unexpected offer, then you may have an argument for investment income. In either case…your holding costs can reduce the taxes from the gain.

  3. My intent is always to keep the property, if someone will give me enough rent to actually cash flow.
    Unfortunately most SFH around here won’t cash flow well. Buy a place rehab it and have a projected monthly cost of $2200 but can only rent it for $1800, not a good one to keep.
    Oh but I can sell it for a $35K profit, phew dodged a bullet there!
    Now I will just take that seed money and get a place that will actually make me money every month.

  4. First off, I am not a CPA or a tax attorney but a few things to toss into the mix–here in GA, if you sell a property and are not a GA resident (or don’t have a GA entity) you may be liable for a 3% tax on the proceeds (if there is a gain over $20,000). Likewise, with all the foreign investors kicking tires in US real estate, it would be wise for them to check into FIRPTA and whether or not that Federal 10% tax will apply to them (a tax for people not taxed as US-citizens). Just a few more to think about! Bo

  5. Great article. But really, basing the tax owed on intent… just proves that we are long overdue for extensive tax reform. Oh, and can I argue an audit based on my hard drive crashing?

    • Thanks for your comment Steve. Yes tax reform is definitely needed. Keep in mind ” intent” is not a simple as stating it as such. You will want to be able to support that intent. An example would be if your intent is for a property to be an investment rental, then having an actual renter in there is ideal. Other ways that may be helpful would be advertising the rental, showing it, getting applicants, etc. etc. If we say the intent is a rental but all signs point to us trying to flip it immediately then that will not work in an audit.

  6. Mackenzie Wallace

    Hi Amanda,

    So if I am understanding this correctly…if I work a regular 9-5, and am doing (or hope to be doing I should say) flipping on the side with my mother (just us and our small LLC) we will be subject to high capital gains taxes and would be unable to use a 1031 form? This is not our sole source of income, it’s just something we want to do on the side. Granted I’m an attorney, but Tax was never my strong suit 🙂


    • Amanda Han

      Hi MacKenzie: The difference of paying taxes as a flip versus capital gains as a rental and also getting the ability to do a 1031X is not whether or not you have another job…it depends on the property itself since each transaction. So in your example, it is possible that with one property you can get capital gains treatment/or 1031X while on another one you pay ordinary income taxes. In short, if you can show that your intention was to purchase this as a rental rather than as an “intended flip” odds are you can get a better tax answer. Thanks for reading!

  7. I am looking to start buying properties, rehabbing them and then selling them. My husband works, but I do not. This would be considered my “income” contribution. What kind of taxes would we be subject to for these transactions? And should we be forming an LLC for the purpose of buying and selling the properties? Any insight you can give would go a long way. Thanks.

    • Amanda Han

      Hi Andrea:

      The answer depends on how many deals you do and if your intend is simply to flip or if you intend on holding it as a rental first. The latter potentially results in lower taxes. With respect to the entity question..that will depend on how much gross and net profit you expect to make so I suggest you meet with your tax advisor prior to purchasing the property to plan accordingly.

  8. John Gossett

    Comment and question about “intent”. The example was given of an intent to rent that turned into a flip and thus gained capital gains tax status. The intent I would like to address is the idea that flipping could be seen as an investment vehicle to accumulate capital towards a larger investment purchase. For example, suppose I wished to accumulate $200k towards purchase of a multi-family rental unit and I chose to accumulate said funds by flipping sufficient quantity of properties to meet my goal. If I set up a business plan stating that was the goal of the business, and opened a bank account for that purpose and funneled ALL flip profits to that account and subsequently invested the proceeds in a multi-family deal, to my mind I’ve met the criteria of investment intent for flipping. However, none of my searches on this topic has stated that flipping profits slated expressly for investment purposes meets the IRS “intent” definition to apply capital gains tax treatment to said investments. Where is my reasoning unsound?

    • Shaun Reilly

      That doesn’t matter what you intend to do with the money you earn.
      Any kind of flipping is basically a job and will be taxed like any other ordinary income.
      Saying you are planning on using your flip profits to by rentals so it should be taxed different is any different than getting a 2nd job at McDs and saying all the extra money you are making is going to go towards your investments and wanting to have it taxed different.

  9. Jules Dominguez

    Hi, I’m looking to start investing in Real Estate some for flipping and some for rentals. What is the best way to do this? Should I start an LLC, an Inc, or do it personally? Also, what is the best way of finding a good tax professional that can advise on these matters?

    • Bo Wagner

      An LLC gives you an extra level of protection between you as an individual and your company. You need to set up an LLC and if you will accept any funds as that LLC (proceeds, rent, etc.) you will need a bank account so you can go to to obtain a tax ID number (a/k/a EIN). As far as finding a CPA, it is best to seek one in your actual area (or seek input from other peers in that area). If you were in Georgia, I could give you some ideas but I don’t have any idea about the LA marketplace. In sum, the LLC is for protection; it MAY also be a good idea for taxes BUT that’s a question for a CPA! Good luck on your journey!

  10. Hi,
    My husband and I currently own two rentals that we file on our personal taxes. We are planning on partnering up with local couple (husband and wife) to flip properties in Washington state. Because we are partnering we don’t want the transactions mixed with our personal taxes. Should we get an LLC or S Corp? We have been told to get an LLC but then file it as an S Corp. Also if we are doing a lot of the work ourselves would we draw a salary prior to the sale?

  11. I have purchased a couple of acres in Tennessee that I was going to build a house on after retirement. I purchased this at a tax sale for 3500.00 Now, I have extended in the military and want to sell the land (55k) and use the profit to helps by a house at my next assignment. Can I use a 1031 to do that?

  12. What if the person doing the flip is a contractor by trade and files a Sched. C already? Can the flip be included on the Sched C with orhter business income and expenses or is it investment income? House bought in July 2015 rehabbed and sold in Dec 2015

  13. I have a very complicated situation and don’t know where to go for answers even though I have a CPA. My wife and I purchased a home in 2007 with the intent to rehab/improve it and sell it. The real estate market crashed and we could not sell it. Finally, out of desperation, we had to begin renting it and that came with it’s own perils. After waiting for the market to rebound (never did) we sold the property in 2015. The overall loss was some $200,000.00. So do we treat it as an active business since our original intent was to flip, or treat it as a rental property/long term investment? Thanks very much.

  14. I’ve never flipped, but in about 10 years I’m considering maybe buying one or two homes, remodeling them, and selling them. I’m still very unsure of the process, hence why I’m reading about it now! I’m guessing you can go to the bank with a 20% down, have them loan you the rest, renovate it out of pocket, and then sell it with a real estate agent (and pay off the loan with the profit)? My main question is, if I buy it for 150k, costs are 60k, and I sell it for 250k, what will I be taxed on–the 250k sale price, or the 40k profit? Because if I have to pay 30% taxes on the 250k sale price, flipping looks far too expensive to even make the smallest of profits off of, unless you want to resell for about 3x the original price (unfeasible in my area). I can accept paying 12k for taxes, but not 75k!

    • ZOVESTA, you should only be responsible for paying taxes on what you net from the sale–not the gross sale price of the flip. Sale price minus sales commission you pay realtors minus your purchase price minus all the materials and labor you paid for. What exact amount you pay from your net will be affected by other factors regarding your filing status, etc. Document everything.

  15. Hi,
    First, very helpful comments.

    I have a situation where I have the opportunity to buy a neighbors house for very reasonable, update and sell it. I have never flipped a house before. Is it correct to state that if I sell the house within one year, I would pay ordinary taxes on the profits? And if I wait to sell for at least 1 year, I can sell the house and pay only capital gains on the profits?


  16. This is an interesting article, but it really doesn’t explain how to prove intent. I recently bought a place that I was going to use as my primary residence, but my perspective has changed and now I want to fix it up and sell it within a few months. It’s totally true, but any flipper could claim the same. I don’t see how this avoids capital gains. The facts remain. Bought, renovated, sold all within a short time frame – a flip.

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here