What is Flipping in Real Estate Terms? --Tax Consequences in Flipping Property

Hello Hampton Roads,

What is Flipping in Real Estate Terms?

Flipping in real estate terms means buying property and then quickly selling it for more than what you paid. Though a handsome profit can be made on the back end, real estate investors will tell you money is made when you buy. The key to flipping real estate is acquiring properties for less then market value so you can assure yourself a profit when you sell.

Tax Consequences in Flipping Property

A major consideration in flipping houses is the tax consequences. Many people are aware that they can make money flipping homes, but few realize that taxes can reduce their profit. Investment profit from the sale of stocks and the sale of real estate is considered a capital gain and is taxed either as short-term capital gains or long-term capital gains. Short-term capital gains apply for property held less than 1 year and can be as high as 35% ,while long-term capital gains apply for property held longer than 1 year can be as low as 15%.

If several flips are completed in a short period of time, the IRS may choose to view these transactions as a business or trade rather than an investment property. If the IRS determines that your real estate transactions are a business, then instead of paying capital gains, you will have to pay ordinary income taxes, plus 15.3% in self-employment taxes.

There are ways to pay less in taxes, and maximize profit.

  • The easiest way is to hold onto property for longer than a year so long-term capital gains with their lower rate will apply.
  • Another thing to do is move into investment property so it becomes a primary residence and live there for a total of 2 years (730 days) out of the last 5 years (and it does not have to be sequential days). Once this criteria is met and you sell the property, you can exclude up to $250,000 in capital gains if you are single and twice that if you are married.
  • Keep good records to claim real estate tax deductions. The cost of improvements you make on the property can be a deduction.

In today’s market, the possibilities to find bargain properties are plentiful. Fore more information about purchasing a home or investment property in Hampton Roads real estate, please fee free to contact me.

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