What is Flipping?
Investors make money in real estate in many ways depending on what their interests and skills are that can help add value to a real estate purchase. Flipping is just one way of making money in the property market that has been proven successful. It is a real estate investment strategy that an investor purchases a property and resells it for a profit. Flipping can be one of the most profitable and popular forms of real estate investing.
The basic idea is to purchase a property that is at a lower value, and after some improvements are done to the property, it is sold at a higher price. Others who are good at fixing up properties, or who are willing to hire someone, make money in real estate by purchasing a cheap property that requires repair or upgrading. It is cost-effective, and that will give the property a good chance of being sold at a higher price. This strategy may also work by purchasing properties of low prices and selling them when price goes up. Others make money by buying properties and then renting them out to other people or to business this involves having a certain amount of property management skills to be successful. While flipping is popular and potentially profitable, there’s a catch, unless your flip meets certain requirements set by the IRS, it could be subject to self-employment (SE) tax, which eats an additional 15.3% against profit.
How can flip be subject to Self -employment tax?
If you want a zero self employment tax, think of the word INTENT. What is your intent in the purchase and sale of the house? Is it to flip the house, or fix it and rent it? How would the evidence support your intent? The difference does have a significant impact on taxes. If the evidence gears towards an intent to flip the property and not to rent the IRS would likely take it more as an ACTIVE investment than a PASSIVE investment, therefore would treat you more like a DEALER (fix and flip) than an INVESTOR (renting the property). This is the difference between your income going on schedule C (paying SE tax) or Schedule E (and not paying SE tax). There are tax differences between flips and rentals that an investor should at least have an idea on tax implications of flipping and renting the property: Flips are subject to SE tax of up to 15.3%. Flips are treated as inventory so it is not eligible for depreciation. Flips are not eligible for any sort of Capital Gains tax treatment, but are taxed at a higher income tax rates no matter how long the property is held.
Depending on the situation and the evidence of intentions, you can be flexible in what strategy you choose to reduce your taxes. Get a smart CPA on your team to figure out the best strategy for you. Here at Camuso CPA PLLC, we do have the ability to offer services. To our clients who have inquiries, please don’t hesitate to give us a call today for real estate tax help. One of our friendly and knowledgeable representatives will be happy to answer any questions you have.