Hello,
I have recently done a flip that has netted me 30k in profit. Now my question is taxes I need to pay on this.
Purchase Price - 78k
Repairs - 10k
other expenses - 2k
sold for 120k
I work full time and do this on the side(in my name, no corp or LLC). My income tax level is 28%
Any tax help would be appreciated
congrats on the successful project!
flips are not capital gains. it is ordinary income on Sch C.
be sure to include ALL your business expenses associated with this project: cell phone, office exp, fax line, vehicle mileage (you kept a log, didn’t you? no? make one.) because all these business expenses are deductible to reduce that income.
after that, you’ll probably pay around 43% on the net.
Hello McWagner,
Thanks for the reply. Yes I did keep a log of mileage and business expenses. I guess Im a little confused about the 43% on the net profit.
I thought I would only have to pay 28%(ordinary income rate) on net since I held the property for under a year?
I have not been deemed a “dealer” so I should not have to pay social security and medicare - I’m assuming thats where the other 15% is coming from.
My accountant stated the following:
Gain on the sale of your home is reported on Schedule D as a capital gain. If you owned your home for one year or less, the gain is reported as a short-term capital gain. If your owned your home for more than one year, the gain is reported as a long-term capital gain.
this is not a dealer issue. flips are ordinary income subject to income and self employment taxes.
Now I am completely lost… my accountant stated this…
Gain on the sale of your home is reported on Schedule D as a capital gain. If you owned your home for one year or less, the gain is reported as a short-term capital gain. If your owned your home for more than one year, the gain is reported as a long-term capital gain.
this is not the sale of your home (residence). nor is this an asset held for investment.
you are running a business. the business has inventory, which happens to be a house. you bought inventory, processed it, and are reselling it. ordinary Sch C income subject to income and SE taxes.
however, if you were living in this place while you were fixing it up, then, yes, it may be a capital transaction.
Thanks for all the help mcwagner but now I am completely lost. I dont have a business.
I work full time as a web designer(get a W2 every year)and bought this home as an investment. Even the loan I got was an investment non-owner occupied loan.
Spoke with accountant and he stated I should not have to pay anything other than short term gains. If he is wrong please let me know and I will fire him as my accountant.
You have a part time business, in which you are the sole proprietor. Therefore you are both the employer and the employee. Self-employment income taxes are the social security and medicare withholdings you pay on your self-employment income.
Self-employment income tax rate is 15.3%, so when added to your 28% ordinary income tax rate, the total tax bite is about 43%.
Accountant may not really understand self-employment activities very well, or may be pushing you to take an aggressive tax posture. Follow his advice if you think this approach has at least a 40% chance of surviving an audit, and, he will pay the penalties and interest when you lose; otherwise, search for a new accountant.
yes, mazoo, you DO have a business: Rehabbing this house.
Thanks for all responses… i guess im just braindead to this scenario. I dot have a business license,LLC or corporation. I have a full time job at a company as a web designer. I purchased this property for an investment, just as I would with stock,bonds,etc…
It may meet your definition of an “income property”, but it doesn’t meet the IRS’s…and they are the ones that you need to satisfy in the end.
Keith
Wow guess ill have to bite the bullet on 43%… 
I am now in process of forming an LLC(just myself no partners or employees). Are there any tax advantages to having an LLC?
possibly. depends on 1) how you tax the LLC, which is determined by 2) what it does (rehabs vs rentals), 3) is it going to make cash and 4) how you want to pay yourself that cash.
among other things.
Whether you have a business or not, you have to file form 4797, sale of business property.
If your sale was a short term, the gain is treated as ordinary income in form 1040 and do not have to worry about capital gains.
Self employment tax is due if you are engaged in business as a sole proprietor in a regular basis. In this case the tax is based on the profit not on sales.
Carlos A. Aldana, EA
So, my understanding is that if you are sole proprietor, then you pay self-employment tax. If the home is held in an LLC, Corp, S-Corp, etc., then what taxes are due?
Thanks. 
No, No, No. The tax treatment is not based upon the entity, but rather upon the character of the income.
Active income gets ordinary income tax treatment and self-employment income taxes may apply, but capital gains do not.
Passive income gets ordinary income tax treatment, self-employment income taxes do not apply, however, capital gains tax treatment does.
Property flipping is an active income business. Holding property for the production of income (as in rental use) is a passive income activity.
Whether you flip your property as a sole proprietor, from with a partnership, or from within an S-Corp (or LLC treated as S-corp) is irrelevent. The tax treatments are all the same, ordinary income tax treatment and self-employment income taxes apply. The S-Corp can help you reduce the self-employment income tax bite over the other business entities, but it does not eliminate them.
The C-corp is a taxable entity in its own right, and has its own tax rate structure. Flipping income is still ordinary income to the C-corp, but self-employment income taxes do not apply. Non-salary money you take out of the C-corp is taxed twice – first on the corporate tax return, then again on your personal 1040.
Thanks for that refreshingly clear explanation, Dave T. and McWagner.
McWagner,
You state " this is not the sale of your home (residence). nor is this an asset held for investment"
Since I am selling my home less than two years after I bought it, could you tell me if I will have to pay Capital Gains Tax on the profit. It is a one family and it has been my home since March of 2005. I am selling because do not like the neighbors How does the IRS decide what is a flip and what is not? I did spend about 60 thousand fixing it up as it was not in too good condition when I bought it and if I am lucky, I might profit about the same 60 thousand. Also I am not planning on buying another house right now, I am planning on buying a business.
if you haven’t owned or lived in the house for two years, you will pay tax on the capital gain when you sell it. you have two easy strategies to avoid this.
wait until March 2007 to sell.
gather up receipts for everything you put into the house to make it habitable (the $60k you spent fixing it up). this will increase your basis (cost) in the house reducing your gain. you may even wipe out any gain entirely.
Thanks Mcwagner, I figure I really won’t be making any money by the time im done paying closing costs, Re and lawyers fees plus and do a few more things before I sell.
I am hoping to sell before March. In fact the first couple who came to see it last week, wants to buy it so with any luck it will sell early. She loved the bathroom, the fact that it is a four bedroom home and that the basement income is 1200.00 PM.
Thanks again