Self employment or long term investment income

[Robin Evans]

Tax season! We bought a property in 2022, remodeled and sold it in 2023, over a year after the purchase. We did most of the rehab work ourselves. Will the profit be counted as self- employment income or long-term investment income? Thank you for your input!

[Michael Plaks]

Quote from @Robin Evans:

@Michael Plaks We bought it with the intent of rehabbing and renting it out as a rental. Later on decided to sell it. Will that be considered as capital investment?

...We already sold it so the long term capital gains is what we strive for.

First, if you already sold it after 8 months, you cannot "strive" for anything. You have ordinary rates, not long-term capital gains, no matter what the next step is.

And the next step is to determine whether it was business income or short-term capital gains. It does not change your income tax rate, but it does determine whether you owe a 15% self-employment tax in addition to income tax.

And the answer is case-by-case, there is no universal criteria. Your stated intention of renting it can play a role in this determination. But before you rush your decision, you need to realize one critical distinction: treating this transaction as a business allows you to deduct all business expenses against this income. For example, driving. Treating it as a capital transaction does NOT allow it!

The result is that treating it as a business can result in less taxes, even with the SE tax added to the mix. Besides, depending on your other income - such as your W2 job if you have one - it may be less than 15%. As I said, it is case-by-case.