House flipping taxes: the basics before you sell
By Austin Frangoules | Updated | 7 min read
Profit from flipping houses is usually taxed as ordinary income, and if you flip often enough to be treated as a dealer, it can also carry self-employment tax. Holding more than a year can qualify an investor for long-term capital gains rates, but not a dealer. Plan for tax before you count the profit, and get advice from a CPA.
Dealer or investor: the question that drives the tax
The IRS looks at why you held the property. Property held mainly to sell to customers in the ordinary course of a business is inventory, and the seller is a dealer. Property held for investment is a capital asset. There is no single bright-line test; frequency of sales, how long you hold, how much work you do and how you market all matter.
| Dealer (flipping as a business) | Investor | |
|---|---|---|
| What the profit is | Ordinary business income | Capital gain |
| Held over one year | Still ordinary income | Long-term capital gain rates may apply |
| Self-employment tax | Can apply | Generally does not |
| Depreciation while held | No; inventory is not depreciated | Possible if rented |
| 1031 exchange | Not available for property held for sale | Possible for investment property |
| Installment sale | Generally not available for dealer property | Possible |
Self-employment tax
If your flipping is a business, net profit can be subject to self-employment tax on top of income tax: Social Security on earnings up to the yearly wage base and Medicare on all of it, plus an additional Medicare tax above certain income levels. That can add a meaningful share to the tax on a flip. How you structure the business, for example an S corporation election, can change how much is subject to it. That is a question for your CPA.
Holding period
For an investor, property held one year or less produces a short-term gain, taxed at ordinary rates. Held more than one year, a long-term gain may get lower rates. Most flips last under a year, so even investors often see ordinary rates. Dealers do not get long-term rates no matter how long they hold.
Your basis: what you subtract from the sale
- Purchase price and buy closing costs that are part of acquiring the property.
- Rehab costs that improve the property.
- Selling costs like commission and seller-paid closing costs reduce the amount realized.
- Carrying costs such as loan interest, taxes and insurance during the hold. Whether these are deducted as you go or added to the cost of the property depends on your situation; ask your CPA.
Habits that save money at tax time
- Keep every receipt and invoice by property, and tie them to budget lines.
- Use a separate bank account and card for the business.
- Collect a W-9 from each contractor before you pay them, so year-end 1099 forms are easy.
- Set aside a share of each profit for tax when the flip closes, not in April.
- Ask about estimated tax payments so a big closing does not bring penalties.
Questions to take to your CPA
- Based on how often I flip, will my sales be treated as dealer property?
- Should I hold flips in an LLC, and does an S corporation election make sense for me?
- How should I treat interest, taxes and insurance during the rehab?
- Do I need to make estimated payments, and how much?
- What records do you want from me for each property?
Questions
Is house flipping profit capital gains?
Often not. Flipping as a business usually makes profit ordinary income. Investors who hold more than a year may qualify for long-term capital gains. It depends on your facts; ask a CPA.
Do flippers pay self-employment tax?
They can, if the flipping is a trade or business. Investors generally do not. Your CPA can tell you which applies.
Can I use a 1031 exchange on a flip?
Generally no. A 1031 exchange is for property held for investment or business use, not property held mainly for sale.
For education only. Not legal, tax, lending or investment advice. Loan programs and guidelines change and vary by lender; confirm current terms with your lender.