Question:

How do taxes affect profit when flipping real estate property?

Answer:

Many people consider flipping real estate property so profitable. It can be, for sure, but is never that easy as one may think. Just go get a house cheaply and resell.

How about taxes when flipping real estate? Many people do not know that taxes due when primary residence is sold are much lower and a whole lot different issue from taxes due on investment properties. Taxes are what makes the difference in a good real estate flipping.

In fact, if you buy a house and retain it for more than a year or at least as long as it can be considered long-term capital gain, you will owe taxes somewhat between 10 and 20 percent. Keep it for a shorter period, it will be considered short-term income and there you go - tax is doubled, which takes out a substantial part of your profit.

IRS and Real Estate Flipping as Occupation

Buy a house, sell it. Buy another one, sell it. Buy yet another one... How long do you think you won't be spotted by the IRS that your investment assets and transactions are a business activity rather than real estate strategy? If they decide you are a real estate flipper and this is what you do for a living based on the track of 10 houses bought and sold by you throughout the year, on top of regular income taxes of say 30 percent you'll get the additional 15 percent for self-employment. Wow.

Yet, a professional real estate flipper will be making nice profit despite taxes, but you could exploit the long-term capital gain and save yourself the hassle.

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