taxes on fix & flip

[Joe Sadusky]

Hey BP!

Have another tax related question that I'm hoping someone can help me out on. 

Up to this point, I have done Buy & Hold on all of my investments so I am not sure how taxes work (aka capital gains) on a fix & flip bought and sold within a year period.

A family member is exploring buying a fix & flip property thru a renovation loan (conventional). 

She currently does not have a house and would be a first time home buyer and is trying to keep all of her options open (quick flip, buy & hold as a rental, or occupy the property for a short period). 

Would it make more sense for her to hold onto the property for the 2 year period to avoid the capital gains? 

How would it work if she were to sell before the one year mark? 

As she is trying to weigh her options, I am trying to help advise how the transaction could effect her come tax time. 

Thanks in advance for any help! 

[Natalie Kolodij]

Originally posted by @Jeff Forsman:

@Joe Sadusky

Hey Joe,

Buy and sell within 1 year (365 days) will be short term capital gain, or ordinary income, which is whatever her tax bracket will be.

If held for longer than a year, you get long term cap gain rate at probably 15% (although there are three brackets, 0/15/20% depending on income level).

Now, if she's going to do a live in flip, I would suggest staying for two years (760 days). IRS allows an exclusion on the sale of your primary residence IF you've lived in that property for any two of the prior five years.

So, if she's planning on living there, definitely stay for two years. If it's just a flip, I don't know that you want to be holding onto a property for a whole year, but if that's what she wants she'll get the benefit of the long term rates.

Hey Jeff , 

That's not correct. 

It's only ever capital gains if it was a one off circumstance. If they buy the property with the intent to fix it up and re-sell for profit the IRS views it exactly like inventory for any business. 

As mentioned above it's ordinary income tax subject to self employment taxes.