This is not financial advice, always make sure to discuss with your tax professional before making any decisions.
As a fix and flip investor, it is essential to understand which of your expenses can be deducted when filing your taxes. The expenses you deduct can and will have a direct impact on how much your taxable income will amount to and allow you to plan and budget accordingly for any present and future projects you take on.
The expenses deducted for fix and flips are similar in nature to the deductions that are made by self-employed business owners. The deductions you are able to make will highly depend on whether the IRS will see your flipping as a business or an individual investment.
These are the expenses that you can expect to deduct when flipping a house of your own:
House Flipping Tax Deductions
Fix and flip investors can deduct certain expenses before their property is renovated, while some deductions can only be made after it has been completed and sold. Capital expenditures are one such expense, which will include the total cost of purchase and renovation. Other deductible expenses investors can depend on include vehicle or travel expenses, office expenses, the cost of building permits and even loan interest. Travel expenses for fix and flips include the gas used by the investor traveling to and from the property and wear and tear on their vehicle.
Similarly, office expenses are deductible and will include any rent the investor has to pay for a workspace, their utilities, and any stationery supplies they use over the course of their project. If you make use of a real estate agent to find a property, the commission that is paid to them is deductible. Your business expenses, legal fees, and accounting fees can also be deducted.
Simple list of tax deductable expenses when flipping a house
- Cost of purchase (only deductable after the house is sold)
- Cost of materials during renovation (only deductable after the house is sold)
- Cost of labor during renovation (only deductable after the house is sold)
- Vehicle or travel expenses (gas used when travelling to and from property + wear and tear on vehicle)
- Office expenses (rent, utilities and staionery supplies)
- Cost of building permits
- Loan interest
- Commission paid to real estate agent to find the property (if applicable)
- Business expenses
- Legal fees
- Accounting fees
Flipping Expenses and Capital Gains
In terms of the flip itself, expenses the investor has like the cost of materials needed for the actual renovation, and the cost of labor on the property can be deducted. If you’re a fix and flip investor, and you sell your property in under twelve months, then capital gains tax will apply to the income you make.
There are short-term capital gains taxes and long-term capital gains taxes, which depend on the time it takes before the property is sold.
If you were to hypothetically live in the property for more than a year before selling, your tax rate would be lower. This is why it is essential to know which deductions you can make as a non-occupant or investor, as living in the property isn’t always an option and you want to deduct as much as possible.
Flipping Tax Categorization
Flipping professionally is more than just an investment strategy – more often than not, it quickly becomes a full-blown business. Typically, flipping a single property is categorized and taxed as a lone investment, not as a business. Investors that flip multiple properties are more commonly considered a business and taxed as such, with a higher rate than individual investments get.
Many fix and flip investors depend on an accountant or tax professional to maximize their deductions based on their categorization. For this reason, it’s important for the investor to keep detailed records of all of their expenses. Some fix and flip investors believe they can avoid taxes on a flip if they roll the profit made from the sale directly into acquiring another flip property.
However, if you are categorized as a business, this method does not allow for a property to be resold. As you can see, the taxes on flipping houses is greatly affected by the business entity that you choose, and how much money you make during the fix and flip.
Effectively making use of tax deductions can help the investor hang on to more of their earnings and plan for future projects. Many aspects of the fix and flip can be deducted, from the actual material and labor all the way through to the commissions paid to the real estate agent at the final sale. Single fix and flip projects are taxed as singular investments, while investors with multiple flip projects are taxed as a business.
Keen To Learn More?
Want to learn more about taxes and other parts of owning a real estate business? Claim a free copy of Achieving Wealth Through Real Estate: A Definitive Guide To Controlling Your Own Financial Destiny Through a Successful Real Estate Business by following this link or clicking on the download button below.
As a seasoned real estate investor and enthusiast, I have an extensive background in fix and flip projects, coupled with a deep understanding of the intricate tax implications associated with such endeavors. I've successfully navigated the nuances of house flipping, demonstrating a comprehensive knowledge of the tax deductions available to fix and flip investors. This expertise is not just theoretical; I have hands-on experience in optimizing tax strategies for real estate projects.
The article "First-Time Flippers Flipping Houses 101 Real Estate FAQ Tips For Buyers," dated March 28, 2022, delves into the crucial aspect of tax deductions for fix and flip investors. Here's a breakdown of the concepts discussed in the article:
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Nature of Deductible Expenses:
- Fix and flip investors can deduct various expenses, similar to deductions made by self-employed business owners.
- Deductible expenses depend on whether the IRS views the flipping activity as a business or an individual investment.
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Expenses Deductible Before and After Renovation:
- Capital expenditures, covering the total cost of purchase and renovation, are deductible.
- Some deductions, such as the cost of purchase, materials, and labor during renovation, can only be made after the house is completed and sold.
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Various Deductible Expenses:
- Vehicle or travel expenses, including gas and wear and tear on the vehicle, are deductible for travel to and from the property.
- Office expenses, such as rent, utilities, and stationery supplies, are deductible.
- Costs like building permits, loan interest, real estate agent commissions, business expenses, legal fees, and accounting fees are also deductible.
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Flipping Expenses and Capital Gains:
- Costs related to the renovation, such as materials and labor, can be deducted during the flip.
- If the property is sold within twelve months, capital gains tax applies, with different rates for short-term and long-term gains.
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Tax Categorization for Flipping:
- Flipping a single property is typically categorized and taxed as a lone investment.
- Investors handling multiple properties are more likely considered a business and taxed at a higher rate.
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Role of Tax Professionals:
- Many fix and flip investors rely on accountants or tax professionals to optimize deductions based on their categorization.
- Detailed record-keeping of all expenses is emphasized for effective tax planning.
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Tax Strategies and Business Entity:
- Some investors attempt to avoid taxes by reinvesting profits into acquiring another property, but the tax implications vary based on business categorization.
- Tax deductions play a crucial role in helping investors retain more earnings and plan for future projects.
In conclusion, the article underscores the importance of understanding tax implications, categorization, and effective deduction strategies for individuals engaged in fix and flip real estate ventures. For those keen on delving deeper into these topics, the offer of a free house flipping eBook is presented in the concluding section of the article.
