5 Tax Implications and Tips if You Flip Things for Profit

Self-Employed Taxes when you buy real estate.

“Flip houses and make big bucks” scream the headlines. The premise is simple – buy real estate with little down, fix it up, and sell it quickly. What could be easier? Well, easy or not, one thing the promoters rarely tell you is that you’ll pay taxes on any profit you make if you are selling investment property and not the home you live in (your principal residence). 

If you flip houses or things like furniture for a profit, here are some tax implications and tips about your taxes, and possibly how to lower them:

Slow Down to Save Taxes. If you buy a house or condo, fix it up and then sell it in less than a year, you’ll pay taxes on the profit at ordinary income tax rates (10%, 12%, 22%, 24%, 32%, or 35%) based on your income. Hold it for more than a year and you’ll be taxed at the lower long-term capital gains rates (0%, 15%, or 20%), depending on your income

You may decide it is worth it to you to flip the property quickly, but if you get caught in a slower market and can’t unload it quickly, you’ll save a lot on your taxes by holding it more than a year.

Serial Investors Don’t Necessarily Get a Tax Break. There’s a rumor that you can sell a home and escape taxes by rolling the gain into a new property. That rule, however, hasn’t been around for almost 25 years, and even then applied only to personal residences. 

To get a tax break for gains on personal residence sales, you’ll have to move into the home and live there at least two years out of five years. If you do that when you sell, you can exclude $250,000 of the gain from tax (twice that if you are married filing jointly).

Sec. 1031 Exchange Rules. The only way you can avoid current tax when you sell investment property is through a “1031 exchange”, where you involve a third party, called an accommodator, to hold the money and buy a new property for you. But there are some rules you have to comply with: 

  1. You can’t touch the money.
  2. You have to identify the new like-kind real property within 45 days after property being given up is transferred and close within 180 days.
  3. The new property has to cost at least as much as the old one.
  4. You can’t be relieved of debt (so you can’t use the proceeds from the sale to buy a new property for all cash if the old property had debt tied to it).  
  5. You will pay hefty fees to the accommodator to handle all this for you.

Flipping Houses as a Business. If you buy and sell property frequently, the IRS could decide that you are in the business of flipping houses and aren’t just an investor. If so, you’ll have to pay self-employment taxes of up to 15.3% on your profits, in addition to income taxes.

Buying and Selling Stuff Can Be Taxable Too. If you scout out bargains at flea markets and then sell the furniture and other finds on eBay (or a similar site), you’ll end up paying income taxes on the profits. If you do that just occasionally, you may not have to report the sale on your tax return. However, if you do it frequently, the IRS will consider you to be in a self-employed business since one of the requirements of owning your own business and claiming the income is if you are engaged in the business activity on a regular basis for a profit

How will the IRS know? eBay and similar sites issue Form 1099 to the IRS and sellers at tax time reporting their annual sales. If you make a profit, you’ll need to report it on your tax return and potentially end up paying sales taxes as well (depending on the rules in your state). 

Don’t worry about knowing the tax implications of flipping real estate for a profit when you file. TurboTax Premier will ask you simple questions about you and your investment property and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live Premier CPA or Enrolled Agent, with an average 15 years experience to get your tax questions answered. TurboTax Live Premier CPAs and Enrolled Agents are available in English and Spanish, year-round, and can also review, sign and file your tax return. 

If you are a seller on an online marketplace platform like eBay, TurboTax Self-Employed has you covered. You will be asked simple questions about you and your business and you will receive the tax deductions and credits you’re eligible for based on your entries. TurboTax Self-Employed helps you uncover industry-specific tax deductions that you may not even be aware of. If you have questions, you can connect live via one-way video to a TurboTax Live Self-Employed CPA or Enrolled Agent with an average of 15 years experience to get your tax questions answered. TurboTax Live Self-Employed CPAs and Enrolled Agents are available in English and Spanish, year-round, and can also review, sign and file your taxes.

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