Tax Rules for Flipping a House
Are you in the business of rehabbing and selling houses?
Buying homes, fixing them up, and then selling them
is commonly referred to in the industry as “flipping.” While this may
sound like a hobby or an investment, the IRS may consider it to be a home
remodeling and selling business.
If you are in the business of rehabbing and selling
houses, the profit is considered ordinary income for tax purposes.
If you are a rental property owner or real estate investor, much of the
gain likely will qualify for the lower, long-term capital gain tax rate.
Before you assume this activity will generate the lower capital gains
rates on the sales proceeds, you need to consider several factors. You may
have an active business if:
* You buy, fix, and sell homes on a regular and
continuous basis throughout the year.
* You hire subcontractors.
* You invest a substantial amount of your time in
this activity.
* The homes are held by you for less than one year.
* Your intention is to make a profit.
Keep in mind that no one factor determines a business
activity. You must consider all the facts and circumstances. If you have a
business and not a hobby, the IRS requires you to pay self-employment tax
on your profits. If your business is incorporated, you must pay yourself a
reasonable wage for the services you provide.
