Flipping houses can be a lucrative real estate strategy, but if you’re not paying attention to taxes, you could see a huge chunk of your profits disappear. Nobody likes handing over more money than necessary to the IRS, so knowing how house flipping is taxed can help you keep more of what you earn.
If you’re serious about flipping houses for a living, you need to understand the tax rules that apply to real estate investors. Let’s break down what you need to know to legally minimize your tax burden and keep your real estate business profitable.
How House Flipping Is Taxed
Flipping houses is different from long-term real estate investing, and the IRS treats it accordingly. Instead of benefiting from lower capital gains tax rates, flippers are typically taxed as active income earners.
What Determines How You’re Taxed?
How the IRS taxes your house flipping profits depends on:
- How long you own the property – Short-term vs. long-term investments are taxed differently.
- How frequently you flip houses – If you flip houses regularly, the IRS may classify you as a dealer rather than an investor.
- How you structure your business – Operating as a sole proprietor, LLC, or S-corp affects your tax liability.
Short-Term vs. Long-Term Capital Gains
The amount of time you own a property before selling plays a major role in how much you’ll pay in taxes.
Short-Term Capital Gains (Less Than One Year)
If you buy and sell a property within 12 months, the IRS treats your profits as ordinary income. This means you’ll be taxed at your regular income tax rate, which could be as high as 37% depending on your tax bracket.
For example, if you’re flipping houses as a side hustle and your profits push you into a higher tax bracket, you could end up paying more in taxes than expected.
Long-Term Capital Gains (More Than One Year)
If you hold a property for more than a year before selling, the IRS considers it a long-term investment, which qualifies for lower capital gains tax rates—either 0%, 15%, or 20%, depending on your income level.
If you’re flipping houses frequently, though, holding onto properties for a year or longer may not be a practical strategy.
Self-Employment Tax and Flipping Houses
If flipping houses is your primary source of income, the IRS may classify you as a real estate dealer rather than an investor. This means you won’t just pay income tax—you’ll also owe self-employment tax, which covers Social Security and Medicare.
- Self-employment tax is 15.3% on top of your regular income tax.
- This applies to sole proprietors and LLC owners who don’t elect to be taxed as an S-Corp.
If you’re flipping multiple properties a year, consider setting up an S-Corp or LLC to reduce self-employment tax liability.
Tax Deductions for House Flippers
The good news? There are plenty of tax deductions that can help lower your taxable income. The key is keeping track of every expense related to your flips.
Common Tax Write-Offs for House Flippers
- Purchase Costs – The amount you paid for the property.
- Renovation Expenses – Labor, materials, contractor fees, and permits.
- Marketing Costs – Listing fees, professional photography, and advertising.
- Loan Interest – Mortgage or hard money loan interest payments.
- Utilities & Holding Costs – Property taxes, insurance, electricity, and water while flipping the home.
Keeping detailed records of your expenses ensures you don’t miss out on deductions that could save you thousands.
Should You Use an LLC for House Flipping?
Many real estate investors set up an LLC (Limited Liability Company) to protect their personal assets and optimize tax savings. While an LLC won’t eliminate taxes altogether, it can offer some key advantages.
Benefits of an LLC for House Flippers
- Limits personal liability – Protects your personal assets from lawsuits.
- Keeps business and personal finances separate – Easier bookkeeping.
- Potential tax advantages – Can be taxed as an S-Corp to reduce self-employment tax.
If you’re flipping houses regularly, setting up an LLC could be a smart move. You can read more about the advantages of using an LLC for house flipping and decide if it’s right for your business.
1031 Exchanges: Deferring Taxes on Profits
If you plan to reinvest your house flipping profits into another property, a 1031 exchange may allow you to defer capital gains taxes.
How It Works
- You sell a property and reinvest the profits into another like-kind investment.
- Instead of paying taxes on your gains immediately, you roll them into the next property.
- This strategy helps grow your real estate portfolio without losing a big chunk of your profits to taxes.
However, 1031 exchanges aren’t always ideal for house flippers because they require holding the property as an investment rather than selling for quick profit.
How to Reduce Taxes on House Flipping Profits
Nobody likes overpaying in taxes, so let’s talk about strategies to keep more of your hard-earned money.
1. Hold Properties for Over a Year
If possible, wait 12+ months before selling to qualify for lower capital gains tax rates.
2. Set Up an S-Corp or LLC
An S-Corp election can help reduce self-employment taxes while still allowing pass-through taxation.
3. Use Tax Deductions
Keep detailed records of expenses to write off everything from materials and labor to advertising and loan interest.
4. Reinvest Using a 1031 Exchange
If growing your portfolio is the goal, a 1031 exchange lets you delay paying capital gains taxes by reinvesting profits into another property.
5. Work With a Real Estate CPA
A real estate-savvy tax professional can help you take advantage of every deduction and legal tax loophole available.
Is Flipping Houses Worth the Tax Burden?
Absolutely—if you plan for taxes ahead of time. Many flippers make the mistake of focusing only on profits and forgetting about tax implications, leading to unexpected IRS bills at the end of the year.
Understanding how taxes affect house flipping ensures you maximize profits while staying compliant. And if you’re looking for ways to build a profitable real estate business, check out our franchise opportunities and see how we help investors succeed in real estate.
