@Gregorio Martinez if it is held less than a year you will probably pay ordinary income on the gains which is a lot more than the capital gains rate for property held more than a year. You could be talking 30% compared to 15% or 0% (zero if you fall under the income limit).
I would check with your accountant, or find one to talk about your specific situation.
Thanks, Andrew Kerr! I am looking to purchasing my first investment property in the State of Texas and I notice capital gains tax aren't really discussed when flipping a property.
If you bought a property with the intention of renting it, then got an offer you couldn't refuse and sold it within a year it would be taxed as short term capital gains. That is at your ordinary income rate. If you sold that property after holding it at least one year, it would taxed as long term capital gains. In both cases, you will also have tax on unrecaptured depreciation for the amount of depreciation taken (or allowed, if that's greater.)
If you bought a property intending to fix it and resell it the holding period is irrelevant. The gain is ordinary income and taxed just like any other earned income. The income is also subject to self employment tax which is both halves of medicare and social security.
@Gregorio Martinez The capital gains tax does NOT apply on assets held less than a year. You will be taxed at your marginal tax rate.
Best bet: Consult your CPA and try to not do you taxes yourself.
It actually is "capital gains"; however, it is tax at ST Capital Gain Rates which equals your marginal tax rate. Short term property does not qualify for the lucrative LT Capital gain rates of 0-20%.
Its convoluted for most people. However, you had the basics together and I just made the terms more complicated.
@Gregorio Martinez the reason capital gains tax isn't really discussed when flipping a property is that it falls under different rules. When you flip a property you're essentially buying and selling inventory. Since most flipping transactions have a quick turnaround, the idea is that any profit is derived from the ordinary course of business. Not only is the income you make by flipping taxed at whatever your marginal rate is, it is also subject to Self-employment tax (this can be circumvented with proper entity structure and planning).