Flip tax question

[Chris Kendrick]

So when you flip a house and make profit from it, you basically getting tax alot, like around 40 percent, is that correct? How are all these people flippers making money , i assume that there ARV is really good then to make good profit, but i original thought once you flip a house you could just put the profit you made from that into buying another property and not get taxed, but thats not right? You will always get tax, right?

[Randall Alan]

@Chris Kendrick

If you flip a house within a year of buying it, you pay your regular income tax rate on the income (ie. it gets added to whatever you made that year).  If you hold the house for at least a year, you pay capital gains taxes on it, which are either 0, 15, or 20% - depending on your tax bracket (see below)

But one thing to remember is that all the expenses get deducted from your flip...including purchase and sales expenses, real estate taxes, etc.  You only get taxed on the actual profit after all expenses.  One other thing though... if you had your property for several years and depreciated the property along the way, the government makes you "recapture" that depreciation - which basically means you have to subtract any previous depreciation off the basis of your house and pay tax on that portion you already depreciated.

In short, it takes a really good spread between your purchase / repair expenses and your ARV to make a flip work. Personally, we won't take on a flip unless we think we can net about $50,000 after all expenses - including taxes. I'm sure others might go lower than that... but for the time, effort, and risk - including going over budget - we want that much cushion to make sure we have a successful outcome. We have flipped about 5 homes in the past 5 years. We have come closer to making 6 figures on most all the flips we did - except our last one as the markets were starting to cool, and we had permit issues with it - that one was probably about $50,000 in the end.

These are the capital gains rates for 2023 (this is your gross income (including the flip profits - not just what you made on the flip):

long-term capital gains rate	Taxable income
0%	$0 to $44,625
15%	$44,626 to $492,300
20%	$492,301 or higher

So unless you are somewhat destitute, you are looking at 15% capital gains with a median income, and 20% if you have a higher income.

All the best!

Randy