House Flipping Taxes - Don't Overlook Their Impact On The Bottom Line
When you watch TV, the house flipping shows make little mention of expenses, other than those connected with the actual renovation, and they totally ignore the impact of taxes. If you want to get into fixing and flipping real estate, you need to understand a little about house flipping taxes.
When it comes to taxes, the way to make everything as easy and stress-free as possible is to pay everything you owe - but not a penny more. And to do that, the first thing you need to know is what your expenses are, because the profit (which is what you'll pay taxes on) is decreased dollar-for-dollar by your expenses. You must have receipts for those expenses in order to claim them. So this is the main tenent of minimizing house flipping taxes: save your receipts!
Sounds pretty easy, but in the middle of a flip, things can get crazy, to say the least. You may be a lot more worried about getting those cabinets correctly installed that filing away the piece of paper that shows what you paid for them. However, when it's all over, you'll rue the day you lost that receipt, so get in the habit of immediately filing every receipt away in the drawer, box, envelope, or whatever it is you use.
Now how much tax will you actually have to pay? Well, that depends. First of all, it probably goes without saying, but we're assuming you live in the USA. After that, the amount of taxes will depend on how long you held the house, whether you lived there, and whether or not you are a 'professional flipper'. The tax code treats a flip that was held less than twelve months as a short term capital gain, and the tax rate for that type of income is thirty-five percent of the profit, so make sure you document every last little expense. Besides the costs of the demolition and renovation (labor and materials), keep in mind property taxes, insurance, utilities, appraisal fees, closing costs, real estate agent commissions, vehicle mileage, phone bills, and any other expenses you may have incurred. If you held the house for more than twelve months before selling, it's then treated as a long term capital gain, and the taxes are levied at a fifteen percent rate. So if you're selling a house at right around the one year period, it can pay to make sure the sale falls at the right time. However, if you have a willing buyer and a good profit at the nine month mark, it's probably not a good idea to try and wait. Many things can happen in three months. It may be better to take the bird in the hand, but you'll have to evaluate every situation on its own merits. Finally, if you make your entire income from fixing and selling houses, you're considered to be a professional house flipper, and you will pay income taxes plus the normal fifteen percent self-employment tax. One way to minimize or eliminate taxes on the sale of a flip is to live there for two years. The tax code states that if the house has been your principal residence for two of the last five years, and you've been the owner the entire time, you can sell it and avoid paying taxes on a profit of $500,000 (for couples) or $250,000 (single or filing separately). This sounds like a great idea for someone who just wants to flip for a sideline income, and it can be, but there are some caveats. First of all, if you're going to live there, you will probably be a little more selective that you would be otherwise, meaning it'll take you longer to find the right place. And you may grow attached to the house, throwing a monkeywrench into your plans when two years rolls around. Finally, the experience of living in a house under renovation can only be appreciated by those who have been through it - suffice it to say that it can be stressful. I hope these thoughts on house flipping taxes have been helpful. Please understand that I am not a tax professional, so do not construe any comments here as tax advice and please consult your accountant, CPA, tax attorney, or other tax advisor before making any decisions.
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