Tax strategies for house flippers

12 Replies

Let's say you made a couple hundred thousand in net taxable income from house flipping and you're holding some of that cash through the end of the year until you find another property, so 1031 is off the table.  Other than expensing tools, and using sec 179 for larger equipment, are there any other strategies commonly used to defer taxes?  Of course we will run it by our accountant.  Thanks!

First, you can't 1031 a flip property.

Second, expensing tools doesn't defer taxes.  Those expenses are deductions that reduce your tax liability. 

Third, taxes are owed at the time the income is generated, not the end of the year. So any tax strategies should be implemented before the income is earned (entity structures, etc) or should be generated by other means (tax shelters, etc).

Using either an S corp or a C Corp can allow you to reduce taxes in certain situations. It will depend on both the source of income, the amount of income and your overall financial situation.  You'll want to talk to a tax professional and get his or her recommendation. You should probably talk to an attorney as well if you're concerned about liability impact of this decision.

As @J Scott said, you cant defer taxes on income already earned, so you just deduct all applicable expenses and pay tax on the rest. Running it by your account is a great idea. Saving your receipts and keeping good records are the best things that you can do
Originally posted by @Nancy Zhao :

For flippers homes are treated as inventory, basically think used car dealership.

I have never run a car dealership but in other retail businesses I have run, anything I purchased during the same tax year offset the gains from the sale of other items.  So that's essentially the root of my question.  If I dump the money from the sale of one property into the purchase of another, that should offset my "net", right?

Thank you 

Originally posted by @Ian Saingarm :
Originally posted by @Nancy Zhao:

For flippers homes are treated as inventory, basically think used car dealership.

I have never run a car dealership but in other retail businesses I have run, anything I purchased during the same tax year offset the gains from the sale of other items.  So that's essentially the root of my question.  If I dump the money from the sale of one property into the purchase of another, that should offset my "net", right?

Thank you 

No. You don't get to deduct money spent on inventory. Sounds like you didn't have your accounting right in your other retail businesses either. You can deduct your cost of goods SOLD.

Yes you're that's what we did, income minus cost of goods sold was our net.  It has been a while, and I always let an accountant sort it out.  I was wondering about strategies for RE as our accountant is not super familiar with RE tax strategies.  Thank you!

Originally posted by @Ian Saingarm :

Yes you're that's what we did, income minus cost of goods sold was our net.  It has been a while, and I always let an accountant sort it out.  I was wondering about strategies for RE as our accountant is not super familiar with RE tax strategies.  Thank you!

 There is no RE when you're flipping. No depreciation allowed, homes are treated as inventory. You're basically no different from any other business that buys inventory and sells it for a profit.

flipper , new home builder , wholesaler  all these are selling inventory.. and taxed as such.

you can buy rental property to have depreciation that will help you..  the section 179 as you mention. 

I E buy an airplane you use in your business ( new one ) to fly to your projects will give you substantial deduction.

Buy a back hoe or bulldozer for your business  :)  and in some instance that new big Truck you wanted.. Truck sales are always booming end of the year for this reason.. but those things you go into debt for and you do have recapture.

Flipping  building wholesaling  real estate sales income.. its all taxed.. ergo you need to do pretty well at it. but you need that income so you can buy depreciable real estate that hopefully pays for its self and then goes up in value then you can 1031... also in Oregon think about timber lands in the right area.. you can grow those trees then you can 1031 a timber deed that works slick we have done that.. and still own the land..

Originally posted by @Jay Hinrichs :

flipper , new home builder , wholesaler  all these are selling inventory.. and taxed as such.

you can buy rental property to have depreciation that will help you..  the section 179 as you mention. 

I E buy an airplane you use in your business ( new one ) to fly to your projects will give you substantial deduction.

Buy a back hoe or bulldozer for your business  :)  and in some instance that new big Truck you wanted.. Truck sales are always booming end of the year for this reason.. but those things you go into debt for and you do have recapture.

Flipping  building wholesaling  real estate sales income.. its all taxed.. ergo you need to do pretty well at it. but you need that income so you can buy depreciable real estate that hopefully pays for its self and then goes up in value then you can 1031... also in Oregon think about timber lands in the right area.. you can grow those trees then you can 1031 a timber deed that works slick we have done that.. and still own the land..

Thanks for the ideas!  Sounds like I'm already doing the standard things.  Will look into the timber lands.

@Ian Saingarm

As everyone has pointed out; flipping houses is considered buying and selling inventory. As such, the income you earn is considered ordinary and subject to self-employment tax.

There are strategies involved that allow you to limit your exposure to self-employment taxes.
Furthermore, you may be eligible to put a sizable portion of the income earned towards a retirement account allowing you to reduce taxable income. 

Hi @Ian Saingarm

Of course, every situation is different so consult with a professional you like and trust.

Some strategies I implement for flipper clients in similar situations are:

- Pay no Self Employment: Form LLC and for tax purposes, it will be treated as an S-Corp

- Have kids: Hire them, they pay no tax up to 12K each and you get to deduct 12K. As little as 7 has been approved by IRS. Get creative, there is a lot they can do. A plus here, is since they have money now, it makes everything they buy deductible.

- Home office: Get reimbursed for actual expenses incurred in home office.

- Section 105 plan: Make yours and your family health expenses 100% deductible.

- Augusta Loophole: An S corporation owner can rent his or her entire home to the S corporation for up to 14 days per year and get big tax deductions. The S corporation deducts the full amount of the rent, and the owner realizes the income completely free of income tax.

- Retirement accounts: Implement one if you can and want.

Hope that helped :)