I'm new to the site and have found it very helpful. I'm also interested in REI and am leaning more towards flipping. I have a couple of questions regarding tax purposes. It's to my understanding that capital gain is taxed if you make a profit on a property that you sell without living in it for a certain period of time. As a flipper, is there a way to avoid it or reduce the percentage? Should one do taxes as a business instead of an individual to help this?
You pay capital gains whenever you sell any property for a gain.
If it's your primary residence, and you lived in it for 2 of the last 5 years, you can claim an exemption of $250,000 in gains for single people, $500,000 for married people.
If you hold the property for long term rental, and it's not a primary residence, then you pay capital gains.
If you hold a property for a flip, you pay taxes as normal income based on your tax bracket and subject to self-employment taxes.
There are ways to minimize taxes, but you can't avoid them. you would need to speak to a CPA to discuss how to minimize the tax impact for any of the above situations since everyone's situation is slightly different depending on a range of factors.
Unfortunately as a flipper, your income will be taxed as ordinary income rather than the more favored "capital gain". This is because for tax purposes, the house you are flipping is considered inventory, instead of an investment.
There are still ways to reduce your tax liability, but flipping will be taxed as ordinary income and subjected to Self Employment taxes as well.
However, if you are planning to live in the house when you flip it, then that is a different situation where the "2 out of 5 years" rule would apply.
Hope this helps!
Capital gains tax relates to investments. As a flipper, you're running an active business, same is if you were manufacturing shoes. You're buying raw materials and selling a finished product. Income from flipping is ordinary income and subject to state and federal income tax as well as self employement taxes (i.e., both halves of medicare and social security.)
Unfortunately, the sale of flipped property is subject to federal income tax, self-employment tax and state income tax. It is not subject to preferential capital gains tax rates.
The holding period of a flip does not transfer it from ordinary to capital gains.
You should reach out to an accountant. There are potential strategies involved to reduce the amount of taxes that you pay.
Thank you all so much for the advise! I will definitely do more research and consult a CPA.
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