Fix and flipping tax implications.

[Clay Teegarden]

Hello all! 

I currently have 2 single family rentals but am looking to delve in to fix and flipping as a way to supplement or hopefully replace my W2 income. 

I have 2 questions as it relates to taxes for fix and flipping. First, how does everyone handle the capital gains on a rehab project? I feel like I e read before that 25% of net profit is a good rule of thumb to set aside for those taxes, but what have you all found to be true? 

Second, if youre doing fix and flipping in addition to your W2 income, how does that factor in to your normal taxable income from your W2? Should you set aside additional money aside from capital gains to pay for the income tax increase if you make a profit on a property? 

Thank you in advance to any who reply, it’s appreciated! 

[Michael Plaks]

@Clay Teegarden

There are no capital gains in flipping. It is properly called ordinary business income and is taxed at the same rate as your W2 income, PLUS 15% self-employment tax which is Social Security + Medicare. No different from having a contract 1099 job, really, as it IS a job, unlike rentals. So yes, you need to set aside enough money to pay future taxes.

Taxes are calculated only on your net profit - i.e. after everything is deducted, including labor & materials, holding costs, financing costs and business overhead such as marketing and driving. 

Keep in mind that 95% of first-time flippers LOSE money on their first couple of deals. Instead of worrying about taxes at this early stage, it may be more productive focusing on finding the right deal, the right funding and the right contractors. So you end up in the 5% and not in the 95%.

Taxation of flipping has been discussed on literally hundreds of threads on this forum. Just search this forum for "flipping taxes capital gains" or something like this. Here are a few of the old threads, to get you started (and probably more confused).
https://www.biggerpockets.com/forums/51/topics/1164339-what-...
https://www.biggerpockets.com/forums/51/topics/1177752-capital-gains-on-partial-release
https://www.biggerpockets.com/forums/51/topics/1200256-tax-implications-of-holding-period-for-property-flip-in-florida
https://www.biggerpockets.com/forums/51/topics/1184208-self-employment-or-long-term-investment-income