Paying state taxes flipping houses??

Question

hi guys, do I pay states on house flips????

Kyle J. · Answer

Income from flipping is generally taxed as ordinary income. Flips don't qualify for 1031 exchanges.

Daniel Chang · Answer

@Cameron Ellis

I generally don't like advice on BP that says "talk to an accountant" or "talk to a lawyer" because that's the obvious.  People ask questions on BP to get an idea from other investors before they spend money and talk to professionals.

That said, if you are asking this question, you really should talk to an accountant before you do anything, less you get in trouble with the IRS.

This is my understanding:

"Flips" are considered an active business by the IRS, and not "passive income".  Real Estate is considered  inventory, and gains are considered ordinary income subject to self employment tax as well as income tax with both federal and state.  Therefore, 1031 does not apply.

@Dave Foster is correct, there is no statutory limit.  However, IRS applies what I deem "the sniff test".  If you buy, rehab and sell in <1 yr, without renting it out, that's a flip.  If you buy, rehab, then rent it out for 18 months, then sell, then that could be a buy-hold.  But if all your rehabs are <1 yr, in the same LLC, another rehab is held for 18 months, it is likely a flip.  This is why you should separate your flips from your buy-holds as different businesses.

Of note, even a buy-hold that you sell for gain, you still pay state income tax.  You just apply the capital gain rate if your state has one.

Jeremiah H. · Answer

Kyle is correct. There are lots of ways to limit this taxable income, but it is indeed taxable

Dave Foster · Answer

1031 exchanges are reserved only for property that has been purchased with the intent of holding for productive use in business trade or for investment.  There's no statutory hold period but the general definition of a flipper is someone who purchases with the primary intent of re-selling.  A flip cannot be a 1031 exchange.

Angie Bingham · Answer

Hi Cameron, I am new too but I know so far that there is a form called 1031 exchange, google it. I heard that this form is to show to the IRS that you didn't have capital gains because you reinvest your money in another property. Anyway you are supposed to have your LLC company and pay yourself a salary so you have some money to cover your expenses but the idea is that you always reinvest to grow your business.

Besides you have to find a taxes expert in real estate to work with you.

You need to build your team: attorney, accountant, real estate taxes expert, contractors, etc.

I hope this helps, good luck!

Cameron Ellis · Answer

Do I pay state taxes on house flips?

Paying state taxes flipping houses??

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