Is note flipping taxed the same as house flipping?

Question

Chris Seveney · Answer

@Anthony Howell

Interest on notes is ordinary income. Selling a note no matter how long you owned it is still ordinary income. This according to the two CPA’s I use.

Please consult your tax advisor.

If you flip one note and can do it in a sdira or 401k that is better but if you flip many notes then it could be construed as being active and subject to tax and penalties. Again speak to a tax advisor.

Chris Seveney · Answer

@Ned Carey

That is true as well the way we do our books There is no long term capital gain.

I have heard some people could do their books differently and more complex which potentially could allow for it to be LTCG but there are many gotchas involved such as phantom taxes involved with loan modifications. See below from article

“With respect to non-publicly traded debt, the creditor will realize gain or loss on the difference between the issue price of the new debt and the tax basis in the old debt. This can cause material phantom gain for a creditor who has a low tax basis in the old debt, which can happen when the debt is purchased at a significant discount”

https://www.eisneramper.com/impact-phantom-income-modifications-0820/

Chris Seveney · Answer

@Ned Carey

For notes it’s considered interest / just like interest you get (that $0.67) you get from having money in as savings account

I should have said it taxed at same rate as your ordinary income as it’s not subject to SE taxes.

Jamie Bateman · Answer

Both are typically treated as ordinary income. Best to ask your CPA, though.

Ned Carey · Answer

@Chris Seveney I get that.  What I thought you said was a sale of the note would be taxed as ordinary income. That is the part that doesn't make sense to me.

Ned Carey · Answer

@Chris Seveney  @Jamie Bateman      Selling a note no matter how long you owned it is still ordinary income.That seems extremely odd to me. Did your CPAs say why? Capital gains taxation applies to stocks and bonds. I don't see why it wouldn't apply to a note.

Martin M. · Answer

@Wayne Brooks

Understood. The point was more around the quantity of notes he wholesales... and to ask a CPA.

Re: flips, actually there are instances whereby a flipper is required to pay "SE" taxes (15.3%) on all of the profit from a flip... and other instances where they do not pay on all, depending on multiple factors. In other words not all flips are taxed equally....

If your point is ALL flips (active income) are taxed heavier than long term passive rental income, sure... but I read the original poster's question as a comparison between taxes on wholesaling a note and taxes on house flipping

Wayne Brooks · Answer

The taxes on a flip are because it was a flip, as opposed to properties held long term.  It has nothing to with whether you have “dealer” status or not.

Martin M. · Answer

@Anthony Howell

The heavy taxes from flipping are typically because the IRS assigns you what's called "dealer" status based on selling multiple properties in a year, that you've owned for less than a year. It's that multiple per year part that's key.FYI, dealer classification applies to more than just real estate too, i.e.if you sell 5 cars in a year you bought that same year etc

For notes, I'm not sure. A CPA would know best. My guess though is if you wholesale just one note in a year, no dealer classification taxes. Again though... CPA knows best. Good luck!

Ned Carey · Answer

@Anthony Howell I am not an accountant but I think we need more details. How long have you held the note? are you selling the note for more than you paid or the original face value if you created the note? Are you Wholesaling it i.e. writing a contract to sell the note and then selling that contract?

Verify with a good accountant but ai would think if no capital gain - no tax other than for interest you earned. If it is a note you held for the purpose of collecting interest then it would simply be a short or long term capital gain, subject to appropriate rates. If you intent when buying was to flip the note it is earned income and subject to ordinary tax rates plus FICA (social security medicare etc)

Is note flipping taxed the same as house flipping?

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