Well, That FLIPPING sucks! Taxes and expenses?!

[Tyler Jahnke]

Hello BiggerPockets!

A few things:

1. I have no experience flipping a home, but see myself doing it within a couple years.

2. I'm always looking to soak up as much knowledge as possible.

SO...

You found a property, you fixed it up, now it's time to sell. 

What kinda of taxes and expenses can one expect that would cut into profit?

I've heard various things online...that you would lose 40% of your profits to taxes.

That $30K you just made...is that really only $18K in the bank?

Thanks!

-Tyler

[Christopher Phillips]

@Tyler Jahnke

It's a complicated topic. These are the basics:

If you flip one or two properties per year, you are considered an investor under IRS rules. So you pay capital gains taxes. Short term (held less than one year) is treated as ordinary income, so could pay 35% to 40% or higher depending on your tax bracket. Long term cap gains is taxed at 15% if it's your primary residence, but forgiven if under $250,000 single, $500,000 married. If you can't avoid cap gains due the ownership issues, as an investor you can use a 1031 to roll it into another property.

If you flip more than 3-4 homes in one year, you'll be classified as a dealer and those homes will be treated as inventory. The sales will be treated as ordinary income and taxed per your tax bracket "and" you might be subject to self-employment tax (extra social security and medicare tax) of 15.3%. Dealer classification also prevents you from using 1031 to avoid capital gains taxes. So, for someone doing 5-10 flips in one year, 50% plus of their profits could go to taxes.