Flipping Income Gain

8 Replies

What amount is considered income on house flipping for tax purposes?I purchased a home for cash-no mortgage for 25k put 25k in repairs in and sold for 79k, net 71k. How can I defer or decrease the taxation on income. Property was bought and sold in my personal name, held for over 1yr-non primary residence.

@Yolanda Williams

Check with your accountant, but if you purchased the property with the intention of flipping it, then all your net proceeds will be considered income.

Your net is a lot less than that. Buy for 25 + 25 in rix and sell for 79 is 49. Make sure you are subtracting closing costs from buying and selling, holding costs, lawyer, appraisal, utilities, listing costs, and commissions.

Also look into 1031 exchanges with an accountant. You can roll profits into the next same type investment tax free.

Thank you James. Yes I did state the net profit incorrectly.About 21k. From reading some of the forums, the capital gains tax would decrease to 22%, for holding over a year and 1 month.

The property that was held as a rental initially was not intended to sell;however with the market changes, I thought selling would be wise; as my goal was to replace my employment income before leaving my job to pursue real estate full time. I also have 5 rentals as well.

Had you done a 1031 exchange into another property when you sold it you would have deferred all taxes on the $21k but I don't know that you can do it after it's already been sold

If you purchased one of your other rentals recently, look into the reverse 1031.  It may qualify.

@Yolanda Williams From the sound of it, your description is making the sale of this property seem like it should be classified as the sale of a business asset instead of "flipping".  If you had the intent to flip, which it sounds like you didn't, your flip would be subject to self-employment tax.  But since you rented the property, and for over a year maybe (you said you held it for >1 year, but I don't know how long you rented it for), it looks like you'll qualify for capital gain treatment for the sale of an asset.  

On your tax return, you'd have assets listed out at $25k for building and $25k for improvements.  You'd report gross sales price and any closing costs.  All other costs of operating the rental property along the way are expenses reported against your rental income during the year.  

In your case, what will probably matter the most in defending capital gain treatment is just that you can justify your "intent to rent" the property when you purchased it.  

I recently heard about an investor who held a property for a few weeks over a year, had it rented out for only 2 months during that period, sold it and reported a capital gain on the sale.  The IRS challenged his capital gain treatment and disqualified it, causing it to be reported as a "flip" instead and subject to self-employment status, and they said he didn't appear to have the intent to flip.  He decided not to take the matter further and just took the tax hit and the following penalty.  Anyways, justifying your intent for the property is important.  

I am new to selling property. I typically buy and hold. This year I decided to sell  a rental home I owned since 2014 rented  for about 2yrs and sold in 2017. I purchased another home next door to it in 2016 and sold that home as well. The intent on that home was to "flip" it   So the 2 would be treated differently for tax purposes,

Thank you for your help

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