Short-Term Capital Gain Tax

[Nate' Billingsley-Walton]

Quick question: I purchased property and started to renovate it and my plan was to make it a rental investment until I over spent on the budget. 🤦♀️ Now, I want to 'flip' it but I keep hearing about tax penalties. Please help me!!! 

[Brian Schmelzlen]

Please let me know if I am misunderstanding your question.  I am assuming that you are referring to the fact that as a house flipper you will be paying ordinary income rates rather than the lower capital gains tax rates.

I suppose you can look at this as a penalty, but I wouldn't look at it that way.  Being a flipper, you would be treating your property as inventory, so like any other business that sells their inventory you are paying ordinary income tax rates on the sale.

Essentially, the tax code treats flipping as a business, but rental properties as an investment. 

I am confused by something you said though.  You said that because you overspent on the rehab budget you want to treat it as a flip rather than a rental.  This doesn't make sense to me because if you overspent on the rehab it doesn't sound like you will have much profit, so a rental might be the best way to salvage the situation.