Let's say I own an LLC that does fix and flips. In this scenario, I purchase the property for $100k and sell for $200k. I use $40k from a personal HELOC to fund improvements. Excluding all other deductions, the government would see this as a $100k profit and tax me at short term capital gains rates. I, of course, have to pay back the $40k that I took out for the loan, which reduces my actual profit to $60. So, speaking SPECIFICALLY on owner contributions, can the $40k be excluded from the taxable income since it is not actual profit and rather a loan that has to be paid back? I'm aware that interest charges and other expenses are used to reduce the taxable income. I'm just asking about owner contributions. Because, correct me if I'm wrong, if I cannot exclude that, I'm essentially paying capital gains tax on the loan amount? Thank you in advance for you time!
I am not a tax advisor, so I always recommend to my clients and others that they should seek out their tax professional to determine what is a deductible expense. I can offer some thoughts, but it should not be construed as tax advice, as it is always best to talk to a tax professional, particularly the one that will be filing your tax returns. They will know your specific situation and be more equipped to provide advisory that is customized for your situation.
Your initial expense in the example you described is the $100,000 purchase price. However, if you are flipping a property, usually your purchase price, closing costs when you purchase, holding costs, renovation costs, and selling costs would be considered a cost of goods sold. It should not matter how you financed the renovation costs, if they were spent on renovating that property to ultimately resell, your profit should be calculated as selling price less purchase price, less buying costs, less holding costs, less renovation costs, less selling costs.
Whether you had an outside investor finance your renovation costs or you personally self finance the renovation costs with a HELOC, it should be categorized in your books as either an investor loan (liability) or an owner contribution (equity). When you pay back an outside investor, any interest or percentage of profit you paid them beyond the return of their investment should be some sort of investor profit expense.
You typically wouldn't charge yourself interest if you self financed it, because even if it is an expense on your flip, that interest would typically be income to you. However, if you I see a personal HELOC to finance the renovation costs any interest you paid on the HELOC for the renovation costs might be something you can pass onto the entity that owns the property, but again you should discuss this with your tax advisor. You would probably pay back the HELOC and interest with proceeds from the resale. If that is the case, you would likely call the interest either a cost of goods sold or an other expense, and of course you would zero out the loan liability once you paid it off.
If I haven’t already said it, I can’t emphasize enough that you should seek out a CPA, EA or other qualified tax professional to discuss your specific situation before making any decisions that could have tax implications.
I hope these thoughts (not tax advice) are helpful.
Please clarify that in your example you are saying $100,000 for the purchase plus $40,000 for the renovation…is that how you intended it? I just wanted to clarify that.
Financing is treated separately from calculating gains. When calculating capital gains on a property sale, the amount of financing or how you funded the improvements (like using a HELOC) does not impact the gain calculation. The capital gain is based on the difference between your selling price and your adjusted basis (purchase price plus improvements), regardless of how you financed the deal. In your example, the government would indeed see the $100k profit as taxable, regardless of the loan repayment.
As others have said, cash out/in does not equal profits.
You would be able to deduct interest, taxes, insurance, and much more. It would be taxed as self employment income which would increase your tax burden. That said, you may qualify for QBI which would reduce the tax burden some. Definitely talk with a CPA that understands your situation.
@Jon Thomson In a fix-and-flip LLC taxed as a sole proprietorship or partnership, the $40k from your HELOC is considered a loan used to fund project expenses, not income—and it's not directly deductible just because it's borrowed. What matters for tax purposes is how the funds are spent, not where they came from.
If that $40k was used for property improvements, those costs should be capitalized into your basis in the property. So instead of a $100k cost basis (purchase only), your adjusted basis becomes $140k (purchase + improvements). When you sell for $200k, your taxable gain would be $60k—not $100k. That gain is taxed at ordinary income tax rates, not capital gains, because flips are treated as inventory, not investments.
So no, you're not taxed on loan proceeds. You're taxed on net profit, which already accounts for improvement costs—regardless of how you funded them. Just be sure all improvement expenses are properly tracked and included in the property's basis. This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
Great question—and it’s one that trips up a lot of people in the fix-and-flip space.
To clarify: the $40k from your personal HELOC isn't considered income or an expense on its own—it's simply an owner contribution (a capital injection), not a business deduction. The IRS doesn't tax you on the money you borrow, and they also don't give you a deduction for paying it back.
Here’s how it works from a tax standpoint:
You bought the property for $100k and sold it for $200k, so your gross proceeds are $100k.
If your $40k in improvements were spent on materials, labor, etc., those costs are deductible as part of your cost of goods sold (COGS) or capitalized into inventory, depending on your accounting method. That’s what reduces your taxable gain.
But if you're asking whether simply contributing your own loaned funds (the $40k from HELOC) reduces your taxable gain without deducting the actual expenses those funds paid for, the answer is no.
You’re not being taxed on the borrowed money itself—you’re taxed on the profit from the flip after subtracting actual business expenses. So as long as that $40k was used on deductible improvements (not just sitting in the business account), it’ll reduce your taxable gain.
The key is tracking how that $40k was used—if it was spent on improvements, document those expenses and deduct them. The IRS cares about the expense, not where the funds came from.
