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4 Ways to Save on House-Flipping Taxes

[Updated: Apr 08, 2021 ] May 18, 2020 by Tara Mastroeni
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When most people imagine flipping houses, they picture themselves making big profits. However, they don't necessarily picture themselves paying the sizable tax bill that sometimes comes along with these investments. Luckily, there are some things you can do to save on house-flipping taxes.

If you're curious about how you can save, read on. We've brought you four methods you can use to help lower the amount you can expect to pay after your next flip.

1. Make the property your primary residence

One of the biggest tax hits that real estate investors face is the capital gains tax. However, if you're a casual investor and flipping houses is more of a hobby than a business, you may be able to avoid paying this tax entirely by living in the property that you intend to eventually flip.

Section 121 of the IRS tax code allows you to exclude up to $250,000 of (or $500,000 if you're married and filing jointly) of gains from the sale of a property that's been used as a primary residence.

The catch is that in order to be considered a primary residence, you have to have lived in the home for at least two of the last five years, so this is more of a long-term strategy for avoiding a tax hit.

2. Hold the property for more than a year

Even if you don't want to wait two full years to sell your flip, you can avoid some tax consequences if you hold the property for more than a year. Put simply, when you hold the property for at least a year, you become subject to the long-term capital gains rate as opposed to the short-term rate.

While short-term capital gains are taxed at your ordinary tax rate, which can range from 0% to 37%, long-term capital gains are taxed at a rate ranging from 0% to 20%.

Furthermore, since your flip is likely going to be considered an investment rather than inventory at that point, you'll also likely be able to avoid paying the self-employment tax, which is an additional 15%.

3. Do a 1031 exchange

If you're looking to grow your flipping business, you may be able to benefit from doing a 1031 like-kind exchange. With this exchange, you can defer tax liability on the sale of an investment property by using the proceeds from the sale to buy a new property.

That said, successfully doing a 1031 like-kind exchange involves making sure that you follow certain steps and meet certain time frames. If you decide to go this route, you'll need to have a good real estate agent and tax professional in your corner.

4. Make sure to take your deductions

Lastly, if you've made house flipping into a business, you'll want to make sure you take all of your available tax deductions. Some examples of the types of deductions you can take include:

  • The home's purchase price.
  • Real estate taxes.
  • Mortgage interest that accrued while you held the property.
  • Insurance.
  • Utilities.
  • Labor cost.
  • Materials cost.
  • Office expenses.

The bottom line

Flipping houses can be a great hobby or business, but when tax time rolls around, things can often get a little more complicated. However, that doesn't mean you have to sweat over it every year. Use the tips above to help keep your house-flipping tax bill as low as possible.

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