Hey @Robin Evans,
To answer your question in a sentence: This will be "long term" income.
Let's say you finish a house flipping project within a year. In this scenario, you're subject to ordinary income tax. Here's a breakdown:
Project Details:
- Property Cost: $50K
- Renovation Costs: $30K
- Resale Price: $100K
- Profit: $20K ($100K – $50K – $30K)
For instance, if your regular income is $50K, and you add the $20K from the house flipping, your total income becomes $70K. This places you in the third tax bracket, with a 22% rate. Additionally, there's a fixed self-employment tax.
Income Tax: 22% * $70K = $15.4K
Self-Employment Tax: 15.3% * $20K = $3.06K
Total Tax Due: $18.46K
Remember to account for any state taxes as well.
To defer taxes entirely, you could utilize a 1031 exchange, which allows you to reinvest the proceeds from the sale into a similar investment property, thus deferring the tax payment until a later date.
Example #2: Long-Term Capital Gains
Now, consider a scenario where you hold onto the property for over a year.
Project Details:
- Property Cost: $70K
- Renovation Costs: $50K
- Resale Price: $200K
- Profit: $80K ($200K – $50K – $70K)
Since self-employment tax doesn't apply, you only need to calculate the long-term capital gains tax. Assuming you're in a bracket with a 15% rate:
Long-Term Capital Gains Tax: 15% * $80K = $12K
For tax purposes, we want to either defer it via the 1031 or do the long term capital gains route whenever possible. Best of luck this tax season!
