Real Estate Investing Archives - Page 5 of 5

If you're thinking about flipping houses or if you have already flipped a house, you might be wondering how to report the profit come tax time or whether flipping houses is capital gains? As with any other investment or asset if your selling a house flip that is worth more than you paid for it, then yes it will be treated as capital gains when reporting your income for the year. Perhaps an even more important question though compared to is flipping houses capital gains is whether or not it will be considered short-term or long-term capital gains? When it comes to house flipping the defining criteria for whether profit should be treated as short-term or long-term capital gains is the length of time the house was held. Any profit received from a house flip held less than a year should be treated as short-term capital gains and taxed at your ordinary-income rate. While any profit received from a house flip held more than a year will be considered long-term capital gains and will be taxed at the appropriate capital gains rate depending on your annual income level. What's the Difference Between Short-Term and Long-Term Captial Gains When Flipping Houses? When considering short-term and long-term capital gains when house flipping the main difference between the two is the tax rate you pay on the profit or income earned from the house flip. If you owned a flipped home for less than a year then your profits will be considered short-term capital gains and will be taxed at whatever your earned income is taxed at depending on your tax bracket. If however, you held a flipped home for more than a year the profits from the flip will be treated as long-term capital gains. As of 2018, there are three taxable rates for capital gains including 0%, 15%, or 20% depending on the amount of income you earned for the year. If you earned below $38,600 of taxable income ($77,200 if you’re married filing jointly) then your effective capital gains tax rate will be 0% on the profit earned from your house flip. If your earned income for the year falls between $38,600 and $425,800 ($479,000 if married filing jointly) then your effective capital gains tax rate will be 15% on the profit from the house flip. Finally, if your earned income for the year was more than $425,800 ($479,000 if married filing jointly) then your effective capital gains tax rates from the profit on house flipping will be 20%. Should You Hold a Property to Qualify for Long-Term Capital Gains? Obviously, there are certain tax advantages when it comes to house flipping if you qualify for the long-term capital gains tax rate. However, there are many things to consider before holding property for over a year just to qualify for the long-term capital gains rate when house flipping. At first glance, it might seem like a no-brainer to hold a flip long enough to qualify for long-term capital gains due to the potential tax savings. After all, you might be able to cut the effective tax rate on the profits of your house flip by 10 or 15 percent. However, there are some negatives to consider when holding property for more than a year that might not make the tax savings worth it. The most obvious of those negatives will be the increased holding costs of holding on to a property long-term. If you hold a property longer you will have to pay more in property taxes, homeowners insurance, utilities, etc... In addition, when house flipping often times the name of the game is speed. The quicker you buy, rehab, and sell your flip the quicker you can move onto the next one. Also, depending on how much capital you have available for house flipping holding onto a property long term might mean you don't have enough capital to flip another house, meaning lost potential profits and a higher opportunity cost. So when weighing the pros and cons of holding a house flip for more than a year to qualify for long-term capital gains, make sure you are really looking at all the true advantages and disadvantages of holding properties when house flipping. Best Ways to Hold a Property for Long-Term Capital Gains There are two main ways to hold property to qualify for long-term capital gains. The first is just to leave the home sitting empty and the second is to rent the home out. Each approach has its advantages and disadvantages so let's take a closer look at each way to hold a property long-term for long-term capital gains. Leaving a House Flip Empty The easiest way to hold a house flip long-term is just to leave the home empty but this does have its negatives. To begin with, leaving a home sitting vacant means you need to check on the home at regular intervals to ensure the property is secure and nothing has gone wrong. Leading to the next potential negative, which is empty and vacant homes tend to be homing beacons for theft and vandalism which can lead to additional costs and repairs. Finally, If you choose to leave your flip vacant you typically will have to pay more for insurance as insurance companies oftentimes will charge more to provide homeowners insurance on vacant property. Renting Out a House Flip Renting is another viable option when considering holding a flipped house long term. The advantages of renting your house flip out when holding the property include collecting rent to offset the holding costs, provides a source of income, and someone to keep an eye on the property minimizing the chance of vandalism or theft. Having a renter inside your flip is not all good news though as there are a few negatives. If you are going to move a renter into your freshly updated and redone property you need to take extra care when screening the renters. As the last thing you want to happen is to have a renter destroy the house forcing you to rehab the property all over again. Also, if you are opening your property up to renters they typically will want to stay in the home for a year or more potentially causing you delays when you are ready or want to sell the house. Is Flipping Houses Capital Gains Conclusion How to handle the profits from a house flip and the tax implication of those profits is an important part of any house flipping business. While knowing house-flipping profits are treated as capital gains is just one small piece of the house flipping puzzle. We hope this article has given you a little better understanding of how to handle the profits from house flipping. If you're looking for more information on house flipping finances and or running a house flipping business check out the article we wrote called "How to Flip a House the Complete Guide".