Flipping tax question.

[Matt F.]

For all the flippers out there or tax pros.... What are the income tax considerations related to house flipping ? Specifically how is the gain or loss on the ultimate sale calculated is it ( my purchase price plus rehab cost = basis) less whatever it sells for ? And also how does this gain get taxed? Ordinary income or capital gains? I even heard self employment tax on top of it all. Thanks!

[J Scott]

If you're flipping as a business, the properties will be considered inventory all costs -- the property and the renovation labor/materials -- will be considered Cost of Goods Sold (COGS). Some expenses -- like HOA dues and insurance, may be considered Expenses.

Expenses can be deducted in the year they were incurred.  Profits (Revenue - COGS) will be taxed in the year in which the inventory is sold.

Most likely, income will be considered ordinary income, taxed at your marginal rate.  You may be subject to self employment tax as well.  If your flipping entity is taxed as an S-Corp, you may be able to get around some of the self-employment taxes.