Those popular fix-and-flip TV programs? They never show the successful house flippers stooped over their coffee tables, pulling out their hair, trying to figure out how much of their profit to pay in taxes.
In reality, taxes are a big part of the house flipping business. You could pay less in fix-and-flip taxes by planning your flip with taxation in mind.
Fix and flip taxes: how they work
By definition, most house flippers are short-term real estate dealers. When you buy a home and fix it up, the home becomes part of your inventory. When you sell the home, you’re taxed on the sale.
Plus, you pay self-employment taxes on the personal income you earned from completing the deal.
But you can lower your fix-and-flip taxes by understanding more about how these taxes work. Your tax burden will depend in part on your:
- Ownership time: Will you resell the home within a year? If so, you’ve earned short-term capital gains. Short-term capital gains are taxed like your other income. In contrast, profit on a home you owned longer than a year should be taxed at a lower long-term capital gains rate
- Business structure: Flipping homes as a Limited Liability Company (LLC) or an S-Corporation, instead of doing business as an individual sole proprietor, could allow less fix-and-flip taxes
- Deductions: Rather than deducting expenses from your taxable income, most house-flipping expenses will be capitalized — meaning they’ll be added to the value of the home, lowering the tax burden when you resell the home
There’s no one-size-fits-all formula for paying less in fix-and-flip taxes, but when you adjust these variables to match your unique situation, you can save money at tax time.
