Well, That FLIPPING sucks! Taxes and expenses?!

Rehabbing & House Flipping
9yFollow

Well, That FLIPPING sucks! Taxes and expenses?!

Tyler Jahnke
Rental Property Investor · Oakland, CA · Member since 2016 · 341 posts · 643 votes

Hello BiggerPockets!

A few things:

1. I have no experience flipping a home, but see myself doing it within a couple years.

2. I'm always looking to soak up as much knowledge as possible.

SO...

You found a property, you fixed it up, now it's time to sell. 

What kinda of taxes and expenses can one expect that would cut into profit?

I've heard various things online...that you would lose 40% of your profits to taxes.

That $30K you just made...is that really only $18K in the bank?

Thanks!

-Tyler

1Reply
31 views

Most Popular Reply

Christopher Phillips
Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
9y

@Tyler Jahnke

It's a complicated topic. These are the basics:

If you flip one or two properties per year, you are considered an investor under IRS rules. So you pay capital gains taxes. Short term (held less than one year) is treated as ordinary income, so could pay 35% to 40% or higher depending on your tax bracket. Long term cap gains is taxed at 15% if it's your primary residence, but forgiven if under $250,000 single, $500,000 married. If you can't avoid cap gains due the ownership issues, as an investor you can use a 1031 to roll it into another property.

If you flip more than 3-4 homes in one year, you'll be classified as a dealer and those homes will be treated as inventory. The sales will be treated as ordinary income and taxed per your tax bracket "and" you might be subject to self-employment tax (extra social security and medicare tax) of 15.3%. Dealer classification also prevents you from using 1031 to avoid capital gains taxes. So, for someone doing 5-10 flips in one year, 50% plus of their profits could go to taxes.

2Reply
See this reply in the discussion

14 Replies

Jump to latestLatest
  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    @Tyler Jahnke

    It's a complicated topic. These are the basics:

    If you flip one or two properties per year, you are considered an investor under IRS rules. So you pay capital gains taxes. Short term (held less than one year) is treated as ordinary income, so could pay 35% to 40% or higher depending on your tax bracket. Long term cap gains is taxed at 15% if it's your primary residence, but forgiven if under $250,000 single, $500,000 married. If you can't avoid cap gains due the ownership issues, as an investor you can use a 1031 to roll it into another property.

    If you flip more than 3-4 homes in one year, you'll be classified as a dealer and those homes will be treated as inventory. The sales will be treated as ordinary income and taxed per your tax bracket "and" you might be subject to self-employment tax (extra social security and medicare tax) of 15.3%. Dealer classification also prevents you from using 1031 to avoid capital gains taxes. So, for someone doing 5-10 flips in one year, 50% plus of their profits could go to taxes.

    2Reply
  • Tyler Jahnke
    OP
    Rental Property Investor · Oakland, CA · Member since 2016 · 341 posts · 643 votes
    9y

    Thanks @Christopher Phillips ! I understand it's a complicated topic, but your input has been very helpful!

    -Tyler

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    9y

    It doesn't matter how many flips you do, it is ordinary income tax, plus self employment taxes.  It is Not short term cap gains.

    2Reply
  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    @Wayne Brooks

    You are correct. I referred to when you're selling a primary residence.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Christopher Phillips and @Tyler Jahnke, it doesn't matter if you flip one or one hundred.  If you bought the property with the intent primarily to resell you are a dealer.  Your real estate is inventory and you pay ordinary income. 

    Any property you sell after owning less than a year regardless of intent is classified as inventory and you pay ordinary income.

    The only properties you get capital gains treatment on are those which you purchased with the intent of holding for productive use and you have owned for more than one year. Hence the "capital" in capital gains as in capital equipment not inventory.

    So, yes flipping is an expensive sport from a taxation perspective. It's not just ordinary income but unless structured carefully entity-wise  it is also self employment taxes, ACA surcharge, and in a heavily taxed state like CA - Yikes!

    If you  want to avoid many of those taxes then go into each purchase with a longer strategic horizon.  Buy intending to hold.  Fix then rent then after a year evaluate for salability.  Now you can get at least capital gains treatment.  And if you want to keep rolling forward, the 1031 exchange allows you to use the deferred tax on profits to help buy more properties.

    BTW you may only sell a primary residence and take that exclusion once every two years and only if you have lived in it for two out of the previous 5 years prior to sale.  So you'll have minimum two year hold for that.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
  • Tyler Jahnke
    OP
    Rental Property Investor · Oakland, CA · Member since 2016 · 341 posts · 643 votes
    9y

    Thanks @Wayne Brooks !

    0Reply
  • Tyler Jahnke
    OP
    Rental Property Investor · Oakland, CA · Member since 2016 · 341 posts · 643 votes
    9y

    Thanks @Dave Foster - I like your strategy suggestion of "buying with the intent to hold" then re-evaluate after a year for a sale. 1031 exchange is also a valuable tool.

    Thanks!

    -Tyler

    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    9y
    Taxes are taxes, highest bracket is about 34-36% of your income. Plus additional SE tax at 15.3% that's about 50%. But if you're not making anything aside from that 30k, then obviously your bracket is not in the 50% range. But hey, two 15Ks doesn't hurt.
    0Reply
  • Tyler Jahnke
    OP
    Rental Property Investor · Oakland, CA · Member since 2016 · 341 posts · 643 votes
    9y

    Thanks for your input @Manolo D.

    And @Craig T. - here's some info that might be useful at some point down the line.

    0Reply
  • Shane Kelley
    Electrician · St Petersburg, FL · Member since 2015 · 16 posts · 2 votes
    9y

    If I own the home for at least one year, I only pay capital gains tax? Is that correct?

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    9y
    Originally posted by @Shane Kelley:

    If I own the home for at least one year, I only pay capital gains tax? Is that correct?

    Not if you were intending to flip it.

    [email protected]224-381-2660
    0Reply
  • Shane Kelley
    Electrician · St Petersburg, FL · Member since 2015 · 16 posts · 2 votes
    9y

    @Steven Hamilton II But if I was not intending to flip it I would be good?  I'm living in the property at the moment.  How would intent be proven anyway?  Just curious. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Tyler Jahnke  SEI caps  its not 15% on your total gross income it caps in the 150k range of adjusted gross ( that could be off a little).  So if you make a million in  a year flipping your not payint 15% SEI on top of 40% federal and whatever your state rate is.

    I find that once you get above the threshold of most folks in income flipping income tends to get total tax state and federal of about 35 to 40%  on a one million in revenue.. that leaves 600 to 650k in net profit for the year... not bad... 

    flipping done right is a nice alternative to buy and hold.. if you figure you can leverage into a flip

    and or a combination of buying rentals and flipping..

    to make any big money at flipping though you need to have the ability to scale... same with rentals not going to get rich buying one or two rentals.. same with flipping your not going to make any big money doing one or two a year.. although it could be nice for some who is paying tax and then putting the profits away for their childs college education... do this for 10 to 15 years of one or two a year and you have it made.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    9y
    Originally posted by @Shane Kelley:

    @Steven Hamilton II But if I was not intending to flip it I would be good?  I'm living in the property at the moment.  How would intent be proven anyway?  Just curious. 

     Intent could be shown based upon when its listed etc. If you're living there and go over a year you're looking at capital gain treatment anyway.

    [email protected]224-381-2660
    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free