Most of us compare a flip exit against a rental hold and pick the bigger number. Kasing Ng, a CPA and former Big 4 fund auditor (a few of you know him from here), wrote a guest piece for me on why that comparison is usually pre-tax, and why the after-tax version can flip the answer.

The short version:

If you flip, the IRS sees inventory, not an investment. That makes you a dealer on that property. Profit is ordinary income even if you held it over a year, you owe self-employment tax on top (roughly 15%), and you can't 1031 out of it. Clear $100k, budget the 15% capital gains rate everyone assumes, about $15k, and the real bill can pass $35k.

If you hold and rent, depreciation lowers your basis every year, so it comes back into the gain when you sell. The straight-line piece comes back as unrecaptured 1250 gain at up to 25%, not 15-20%. If you did cost seg, those pieces come back as ordinary income. Then 3.8% NIIT and your state on top.

His example: buy at $1M, hold five years, depreciate about $145k, sell at $1.3M. The property gained $300k but the taxable gain is about $445k.

The flip pays now and taxes it all now. The hold can push it forward with a 1031, the 25% layer included. Neither pre-tax number tells you which keeps more.

The full write-up and a Q&A with him are on my website, which you can find through my profile, and you can sign up there to get new reports by email.

Question for the flippers here who also hold rentals: are you keeping the two in separate entities, and has that ever actually mattered when the IRS asked about intent on a specific property?