House Flipper Tax Breaks

Understanding your taxes with regard to your house flipping business can be incredibly tricky, especially in the wake of the recently passed tax bill. Our first and best piece of advice when it comes to house flipping tax breaks and deductions is to work with an experienced accountant. Hiring an accountant has its costs, certainly, but a good accountant can save you hours upon hours of headaches and confusion, especially if you’re not the best bookkeeper. A good accountant can also help keep you out of jail if you really mess your taxes up. Be sure to figure that into your costs.

That said, and given the fact that we are NOT accountants and that this article should NOT be taken as legal advice, here are some principals that you should keep in mind as you try to figure out your house flipping deductions and tax breaks this tax season:

Most profits from house flips are taxed as ordinary income.

You might think that your house flipping profits should be counted as capital gains (profits from an investment), but the tax code typically categorizes house flippers as “active investors.” Because the investments are short term, house flipping profits are usually taxed as income at a rate between 10% and 37%, depending upon your total income. Even if you only flip houses every now and then, your profits will still be considered regular income in most cases.

If you run your own unincorporated house flipping business, you’ll also be subject to self-employment tax, which means that you should pay estimated taxes on your flipping profits every quarter.

Passive real estate investments are taxed differently.

If a flip doesn’t go so well and you decide to hold onto the property, that will affect your taxes. Likewise, if you decide to rent a property to tenants before eventually flipping it, you’re no longer consider an active investor. Properties that you hold for more than a year and rent out are considered passive investments, and passive investments are subject to capital gains taxes. Likewise, if you’re renting a property, that makes you a landlord, and landlords get all sorts of tax breaks (link to past blog).

Keep track of your deductible business expenses.

As a professional house flipper, your business incurs expenses that are deductible, even if you haven’t formed a corporation or an LLC (though you may want to consider doing that for tax and liability purposes). For example, after making a sale, you can deduct the costs of buying an investment property and rehabbing it. These costs are considered capital expenditures.

You can also deduct office costs, such as the money you spend on rent for an office, utilities, business appliances like printers and computers, and more. The costs of travel to and from your flip can also be deducted as a business expense.

Many real estate seminars and conferences are not deductible.

In most cases, money that you spend on education can be deducted, but usually seminars, books, classes, and conferences about house flipping do not qualify as education expenses.