Note: This article does not constitute tax, legal or investment advice. This article was created for informational and educational purposes only to provide general information on house flipping taxes. We recommend consulting with professional, licensed accountant or tax professional to help with tax planning strategies and preparing for tax season.
Once you've successfully flipped a house and hopefully made a substantial profit, you will have to pay taxes on your flips. This article answers common tax questions such as the type of taxes you can expect to pay, how much tax and potential strategies you can use to save money.
What taxes do you pay flipping houses?
House Flippers generally pay ordinary income taxes on net profits in a Calendar year. These taxes include Federal Income Tax, State Income Tax, & Self Employment Taxes.
Wait, I Thought House Flippers Pay Capital Gains Tax?!
House flipping income is very rarely taxed as capital gains. In the vast majority of scenarios, you will be paying ordinary income taxes based upon your individual income tax rate.
Okay, so How Much Tax Do You Pay Flipping Houses?
The amount of tax you pay will depend on your individual ordinary income tax rate and tax bracket.
- Federal Income Taxes are paid based upon your Federal Income Tax Brackets
- Self Employment Taxes are paid at 15.3% of Net Profit up to $118,500.
- State Income Taxes are paid based upon State Income Tax Brackets
When Do you pay taxes?
Houses are considered inventory and project costs are classified as cost of goods sold. You don’t pay income taxes on the ‘goods’ until the goods are sold. For example, if you buy and rehab a house in 2018, but don’t sell the property until 2019, you would pay income taxes on the profits in 2019.
House Flipping Tax Example
For an example, let’s say a house flipper flips, rehabs and sells 4 houses in a calendar year, that generates $1,000,000 in sales revenue with a net profit of $150,000. The House Flipper’s effective federal tax rate is 20%, with a state income tax rate of 5% and self employment tax of 15.3%.
Federal Income Tax
Federal Income Tax = Taxable Income x Federal Income Tax Rate
Federal Income Tax = $150,000 x 20%
Federal Income Tax = $30,000
Self Employment Taxes
Self Employment Tax = Taxable Income Up to $118,500 x 15.3%
Self Employment Tax = $118,5000 x 15.3%
Self Employment Tax = $18,130
State Income Tax
State Income Tax = Taxable Income x State Income Tax Rate
State Income Tax = $150,000 x 5%
State Income Tax = $7,500
Total Income Tax = Federal Income Tax + SE Tax + State Income Tax
Total Income Tax = $55,630
Net Profit After Tax = $94,370
Effective Tax Rate = 37%
***Note: You may be able to qualify for tax deductions and credits that can reduce your taxable income. Consult with an Accountant or Tax Professional to discuss tax strategies and plan for tax season.
So is there anyway to save money on taxes?
As noted before all profits up to $118,500 are subject to 15.3% Self Employment Tax.
One strategy that can be used to save some money on the 15.3% Self Employment tax is to create an S-Corporation that pays yourself a 'reasonable salary'. As an employee of the S-Corp you would only have to pay the 15.3% Self Employment Tax on the salary amount and the remaining profits would be exempt from the Self Employment Tax.
Let’s use the same example above, where the house flipper makes a net profit of $150,000.
Sole Proprietor Tax Example
A sole proprietor house flipper would have to pay 15.3% Self Employment Tax on profits up to the $118,500 limit.
Self Employment Tax = Taxable Amount x 15.3%
Self Employment Tax = $118,500 x 15.3%
Self Employment Tax = $18.130
NEXT: Setting up business systems
S-Corp Tax Example
Let's say the house flipper creates an S-Corp which pays themselves a ‘reasonable salary’ of $50,000 per year. In this example, the house flipper would have to pay Self Employment Taxes on the $50,000 salary, but the remaining $100,000 in profits would be exempt from Self Employment Taxes.
Self Employment Tax = $50,000 x 15.3%
Self Employment Tax = $7,650
In the S-Corp scenario the house flipper could potentially save $10,480 on Self Employment Taxes!