Flipping a house seems like a fun way to make some extra cash. Many shows on HGTV provide entertaining views of this hobby and couples across the country are jumping on the bandwagon. Unfortunately, once these excited home flippers start the process they may realize that the shows on HGTV often edit out some of the more complicated parts of the process. One in particular: the impact of taxes on the sale.
Uncle Sam is known to take a chunk out of every financial transaction. The same goes for any profit made when flipping a house. As such, certain financial information about the transaction will likely be required in the flipping party’s tax filings. Just how big of a chunk the Internal Revenue Service (IRS) will claim varies depending on the details of the sale. Two common scenarios follow that provide a bit of clarification.
The quick sale!
Congratulations! You purchased a home, successfully completed the remodel, and sold the home for a profit all within one year. Although this successful enterprise is certainly cause for celebration, the tax implications could be harsher than expected. As noted in a recent report on these types of transactions, the profit will likely be considered by the IRS as a short-term capital gain.
This type of income is subject to fairly high taxes, generally 39 percent of the profit.
The slow and steady flip
For some, the flipping process is more of a lifestyle than just a hobby. These home flippers may purchase a property and live in the home during construction. Depending on how long the flipper uses the property as his or her residence, the property may qualify for a tax exclusion as a primary residence.
Furthermore, federal law generally allows exclusion of up to $250,000 of profit after a sale.
Not the end of the tax story
It is important to note that although these scenarios provide some clarification, they are far from the whole story. The frequency of the flips, for instance, can also have tax implications. If homes are flipped regularly, the IRS may consider the practice an actual business and subject to the profits to even more taxes.
Due to the complex nature of tax law regarding these sales, it is wise for those who are interested in flipping homes to seek legal counsel. An experienced tax attorney, like those of Robert Fedor Esq. LLC, can review the details of your flipping venture and provide counsel on potential tax implications, helping to reduce the risk of surprises and potentially even provide some advice on how to structure the flip to make the most of tax savings.