tax question

I will be putting a property that i recently rehabbed, and am looking at a profit after tax of approx. 200k. I have owned the property for over 1 year. My question relates to capital gains. Am I going to pay the 15% rate, long term holding, or will I be taxed as ordinary income?

Thanks fior the help. R

You will only be paying out the 15% long-term capital gains rate.

Flipped property (purchased with the intent to resell) is not capital. It is treated as inventory on a Sch C, is considered ordinary income and subject to income and SE tax. Expect total taxes to approach 50%.

If you have nothing to indicate that you intended to keep the property for investment (rental) such as an existing portfolio of rental properties, copies of advertisements for rent, rental applications from prospective tenants, etc, you will have a difficult time making the case for capital treatment.

I agree with Mark. Your situation is akin to a house builder. Tax law treats the value that he or she creates by building a house as ordinary income. Tax law will treat the value you create through rehab and renovation the same way. Note that you’ll be subject not only to ordinary income taxes but also to self-employment taxes.

Thanks for the input.

My accountant is under the impression that since I do not do enough of these to be considered a full time “flipper” I will not be subject to the full income tax liability. You guys disagree. Hmmm. I flip a property about onvce every two years, and some of them I live in prior to putting them on the market. I have friends who do thius full time, and are considered dealers, but it took them a while to get to this point. What does the IRS use as a guide??

The IRS does not define a dealer specifically. The Internal Revenue Code does define a “dealer disposition” as: Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business.

Property flipping is a dealer disposition, and the word “any” in this definition means that you have engaged in a dealer disposition even if you only flip one property. At the heart of this definition is the taxpayer’s intent. There is ample case law which details certain patterns of activity by which the IRS can determine the taxpayer’s intent.

By the way, the IRS does not really “tag” anyone as a dealer. Instead, each transaction is evaluated on its own merits to determine whether the taxpayer has acted as a dealer to real estate for that transaction.

If your accountant wants you to take an aggresive tax position, ask your accountant if he will pay all the back taxes, penalties and interest when an audit recharacterizes your transaction as a dealer disposition, as well as each flip you did for the past few years. Your decision is whether or not you want to play tax audit roulette.