Understanding Taxes and Flipping Houses

Flipping houses can be a lucrative venture, but it’s important to understand the tax implications before you get started. The amount of taxes you owe will depend on whether you’re classified as a real estate investor or a real estate dealer.

Real Estate Investor vs. Real Estate Dealer

In general, a real estate investor is someone who acquires and holds properties for the long term, while a real estate dealer engages in frequent and rapid buying and selling of properties. Due to the nature of their activities, many wholesalers and house flippers are often categorized by the IRS as real estate dealers rather than investors.
If you are classified as a dealer, your tax obligations may be higher compared to those of an investor. However, there are still strategies you can employ to mitigate the tax burden associated with dealer activities.

Taxes for Real Estate Investors

Real estate investors typically pay lower taxes on their real estate income compared to dealers. This is because properties owned by investors are considered capital assets by the IRS. When an investor sells a house, they are subject to either short-term or long-term capital gains tax, depending on the duration of their ownership of the property.
Short-term capital gains tax applies if the property is sold within one year of its acquisition. These gains are taxed as regular income, with rates ranging from 10% to 37%, depending on the investor’s total income for that year. The following are the tax rates for the 2023 tax year:
Taxable income (Single): $0 – $10,275 (10%)
Taxable income (Married filing jointly): $0 – $20,550 (10%)
Taxable income (Single): $10,276 – $41,775 (12%)
Taxable income (Married filing jointly): $20,551 – $83,550 (12%)
Taxable income (Single): $41,776 – $89,075 (22%)
Taxable income (Married filing jointly): $83,551 – $178,150 (22%)
Taxable income (Single): $89,076 – $170,050 (24%)
Taxable income (Married filing jointly): $178,151 – $340,100 (24%)
Taxable income (Single): $170,051 – $215,950 (32%)
Taxable income (Married filing jointly): $340,101 – $431,900 (32%)
Taxable income (Single): $215,951 – $539,900 (35%)
Taxable income (Married filing jointly): $431,901 – $647,850 (35%)
Taxable income (Single): $539,901+ (37%)
Taxable income (Married filing jointly): $647,851+ (37%)

Long-term capital gains tax applies if the property is held for over a year before selling. The tax rates for long-term capital gains range from 0% to 20% and are based on your income in the year of the sale. The following rates apply for the 2023 tax year:
Taxable income (Single): $0 – $41,675 (0%)
Taxable income (Married filing jointly): $0 – $83,350 (0%)
Taxable income (Single): $41,676 – $459,750 (15%)
Taxable income (Married filing jointly): $83,351 – $517,200 (15%)
Taxable income (Single): $459,751+ (20%)
Taxable income (Married filing jointly): $517,201+ (20%)

Depending on your state of residence, you may also be required to pay state capital gains tax.

In conclusion, comprehending the tax implications of flipping houses is paramount for success in this lucrative venture. IRS classification as a real estate investor or dealer significantly impacts the amount of taxes owed. Investors benefit from lower taxes on long-term capital gains, while short-term gains are subject to regular income tax rates. State capital gains tax must also be considered. Minimizing the tax burden involves strategic business structuring and utilizing available deductions. Seeking advice from a qualified tax professional is highly advised to ensure compliance and optimize your tax strategy for maximum profitability.