Investors

What are the tax implications of flipping houses?

By Steve Lockhart

The short answer

The tax treatment of a flip depends on how you hold and how the IRS sees your activity.

Full answer

The tax treatment of a flip depends on how you hold and how the IRS sees your activity. When you buy a property explicitly to renovate and resell, the gain is typically treated as ordinary income rather than the lower capital gains rate, often as self-employment income if you are in the business of flipping, subject to Social Security and Medicare tax. There is no one-year holding test that automatically fixes the treatment; the facts of your intent and activity drive it, which is why sellers in the trade classify the property as inventory or dealer property.

The good news is the deductions. Every dollar you spend getting the property ready and sold is a cost against the gain: the purchase, closing costs, labor and materials, permits, holding costs like interest, taxes, insurance and utilities, and the selling side including commissions and concessions. Dedicated records, receipts, and a separate bank account for each flip are what make those deductions real at tax time, and sloppy books have ended more flip profits than bad markets.

Nevada leaves the federal treatment alone: there is no state income tax, so a Nevada flipper does not pay state tax on the profit the way they would in most states. Using an LLC or corporation changes the filing picture, and a 1031 exchange generally does not apply to flips because the property is held for sale rather than investment. Because the differences between investor and dealer treatment are significant, the responsible move is a conversation with a CPA before you structure the first deal, and again before you close it, so the tax plan matches the way you actually operate.

A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.

Go a little deeper

Frequently asked

Questions investors often follow up on

Are flips taxed as capital gains or ordinary income?

For most flips, ordinary income, because the property is bought and sold with the intent to resell, and it is often treated as self-employment income if you are in the trade. Long-term capital gains rates typically apply to investment property you held and rented, not to a quick resale.

Can I use a 1031 exchange to avoid taxes on a flip?

Generally no. A 1031 exchange requires property held for investment or productive use in a trade or business, and property held primarily for sale, which is what a flip is, does not qualify. Your CPA can model the actual treatment for your facts.

What records do I need for a flip?

Everything that touches the deal: the purchase contract and settlement statement, every material and labor receipt, permits, utilities and interest during the hold, and the full selling cost. A separate bank account and per-property ledger make the deductions provable and the return accurate.

The Lockhart Method

Your Home | My Strategy | Proven Results

My strategy: the tax structure is set before the offer, not after the closing. We map the flip's income treatment and record-keeping with your CPA early, and the deal includes the tax picture in its profit margin, so the number you count is the number you keep.

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