I read a Forbes.com article that said “if you have an investment property, take it like a sponge and squeeze it.” The article was about how small-time landlords can avoid missing out on major tax savings; like Robert Kelley, who saved $6,000 in taxes due to depreciation alone.
It just goes to show that many people lose out on major tax savings, simply because they don’t know the rules about rental property, or they are unaware of resources available to them. You can read the article and learn more about tax-savings at
Gee, that’s interesting. My observation (from seeing tax returns) is that real estate investors are a pretty savvy bunch when it comes to using their real estate investments to minimize their income tax liabilities…
Who gets screwed up are the newbies who don’t understand the passive loss limitations and who don’t understand that capital improvements need to be depreciated.
Two schools of thought. The conservative approach is to treat it as inventory and the business like a retail establishment. The aggressive approach creates a long term investment company and treats flips as part of the buy/hold portfolio. Quick sales are justified for liquidity, financing, and other business reasons.
If you’re flipping property–and I know I’m going to get flammed for this–you have inventory. So it’s not going to be capital gain or unrecaptured Sec. 1250 gain for you, it’s all ordinary income. What’s more, if you make money, you’ll also be subject to self-employment tax.
This makes sense if you think about… you should be treated no differently than a retailer selling widgets or a builder.
Every CPA has opinions, but I have to agree with Steve here. I’ve personally never had one questioned, but I am aware of an associate here in Dallas that has had capital treatment rejected on specific property within a buy and hold portfolio, when the subject house was flipped.