Taxes and flipping properties

[Spenser Murphy]

Are there any tax advantages to house flipping like depreciation? Are the profits tax free? I want to get into multifamily rentals. Someone recommended flipping houses to raise capital to purchase the rental properties. Thanks

[Linda Weygant]

This can be a complex scenario.

As a W-2 employee, your employer withholds 6.2% of your income as social security tax and 1.45% of your income as medicare tax.  Your employer matches this amount, so the total amount paid in for you is 12.4% social security and 2.9% medicare.

When you are self employed, you are both the employer and the employee, so you have to pay both parts of this for a total self employment tax of 15.3%.

There is also a maximum earned income amount subject to social security tax ($118,500 for 2016).

So let's say you earn $90,000 per year at your W-2 job and $50,000 as a flipper.

Your employer has covered the social security and medicare taxes on the first $90,000, so even though you made $50,000 as a flipper, you've only got to cover another $28,500 in social security taxes.

Medicare has no maximum.  So in this example, you'll pay:

$28,500 x 12.4% = $3534 Social Security Tax

$50,000 x 2.9% = $1450 Medicare Tax

Depreciation is not a consideration when flipping and the profits are most certainly taxable.

The IRS sees no distinction between buying a house, fixing it up and selling it as compared to buying a bunch of widgets, assembling them into a final product and selling it.  It's all ordinary income to them.