How to Pay Tax on Flipping a House

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If you want to get into flipping homes, you’re not alone. The rise in popular television shows like Flip or Flop and other HGTV programs make it seem like flipping is the best way to make money with real estate investing this year. 

But flipping homes is much less glamorous than what you may see on television. The cold hard truth is that flipping homes is a risky investment strategy that requires time, money, and patience if you want to be successful in this competitive industry. 

Flipping homes often requires upfront capital in order to purchase the home and then additional money to pay for renovations. Those with little upfront cash won’t be able to get started as a house flipper today. You’ll need to partner with other investors who have the capital to get started.

Are the potential profits from flipping enough to keep you interested in this risky investment strategy? This article discusses how to start flipping houses and how to pay tax on flipping a house in 2023 and beyond.

The basics of tax on flipping a house

Real estate dealers

The amount you pay in taxes and the manner in which you pay them are heavily dependent on how the state views you and your income. They decide whether or not you’re considered a real estate dealer or a real estate investor. 

Real estate dealers receive less than ideal tax structures compared to those that are considered real estate investors. Real estate dealers are taxed ordinary state income tax rates as well as self-employment taxes that average about 15%.

Real estate dealers cannot complete a 1031 exchange or a section 453 installment sale. They’re also unable to claim the depreciation as tax deductions like real estate investors can. 

Real estate investors

On the flip side, real estate investors receive much more favorable tax treatment than real estate dealers. Real estate investors who flip homes have assets that are classified as short-term and are subject to short-term capital gains taxes when the asset is held for less than one year.

Real estate investors receive plenty of other benefits including more tax deductions from the expenses that are required to flip a home.

How much will I pay in taxes on a fix and flip?

The amount you pay in tax on flipping a house depends on whether or not the court sees you as a real estate dealer or real estate investor. Unfortunately, the vast majority of house flippers are considered dealers and are subject to the tax restrictions we went over above.

Additionally, the total amount of tax you’re liable for depends on the current income tax rate and your federal tax bracket and, of course, the standard 15.3% self-employment tax. The easiest way to estimate how much you’ll pay in taxes when flipping a home is to multiply your taxable income by the current income tax rate.

You may also take the final sale price of your home and subtract your total expenses and other tax deductions. Some of the most common expenses for fix and flips include contractor fees, loan fees, repayment agreements, materials, and labor.

Short-term tax brackets

Source: Fool.com

Long-term tax brackets

Source: Fool.com

When are taxes paid for flippers?

House flippers pay taxes just like ordinary homeowners. Since their properties are considered inventory, flippers don’t need to pay taxes until the final sale of their renovated property. Those that purchased homes in 2021 but don’t sell the property until 2022 will only need to pay taxes for 2022.

Businesses and self-employed individuals must prepay taxes in line with quarterly tax payments if they make over $1,000 per year in profits. Those that don’t make over $1,000 will file their taxes at the end of the year and file a Schedule C each year.

How to save on taxes as a house flipper

Are you looking to save on your taxes as a house flipper? You’ll want to work with a reputable certified public accountant (CPA) and tax professional to guide you through the process of saving as much as possible in taxes. Below are some additional ways you can save on your taxes as a house flipper.

• Registering as an S-Corp. Flippers that register as S-Corps can pay themselves a “reasonable salary” which is the only income that would be assessed the self-employment tax. The remaining amount of income left is exempt from the self-employment tax which could save you thousands on taxes each year.

• Filing a 1031 Exchange. The 1031 Exchange allows you to defer your capital gains taxes on a property as long as you purchase a similar property with the first sale’s profits.

• Take full advantage of tax deductions. There are plenty of tax deductions that you can take advantage of as a house flipper. Things like depreciation, capital expenditures, and other standard expenses required when flipping homes are all tax deductible and will reduce your tax bill each year. Working with a top CPA firm that specializes in real estate tax is the best way to ensure you take advantage of tax deductions.

Final thoughts

Paying tax on flipping a house can be confusing if you are new to flipping or are unfamiliar with the tax laws in your area. We highly recommend talking to a tax professional to ensure you’re taking full advantage of the tax code and that you follow all the regulations around filing taxes as a self-employed individual.

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