House Flipping Taxes & 1099s
Learn how to master the financial side of your house flipping business by understanding core accounting principles and implementing best practices for budgeting, expense tracking, and tax preparation.
Overview
We've talked a lot about the numbers and best practices for managing your projects, but for most of us, taxes can feel like a confusing and intimidating part of the business. You've worked hard to create a profitable deal, and the last thing you want is a surprise tax bill that wipes out your earnings or an audit that catches you off guard.
This article is designed to demystify house flipping taxes and prepare you for a smooth tax season. We'll walk through the fundamental accounting principles of a house flip and highlight the specific information your accountant will need to accurately report your income and expenses. By the end, you'll have a clear understanding of what's required and how to use the tools in FlipperForce to stay organized and audit-ready.
This article is designed to demystify house flipping taxes and prepare you for a smooth tax season. We'll walk through the fundamental accounting principles of a house flip and highlight the specific information your accountant will need to accurately report your income and expenses. By the end, you'll have a clear understanding of what's required and how to use the tools in FlipperForce to stay organized and audit-ready.
The Basics of House Flipping Taxes
The good news is that house flipping accounting is fairly straightforward, especially when you compare it to other types of real estate investing. The key concept to understand is that for tax purposes, a house flip is considered inventory, or a "cost of goods sold" (COGS). This simple fact has a significant impact on when you pay taxes.
FAQ
If I buy a property and spend money on it this year, but don't sell it until next year, do I pay taxes now or later?
That's a great question, and it's a common point of confusion. The answer is, you won't pay taxes on the property until the year you actually sell it. Your income and expenses are only recognized in the year the property is sold, regardless of when you made the initial purchase or started the rehab.
Let's use an example to illustrate. Say we bought a property in November 2024 and began renovations in December. The project takes us into 2025, and we don't sell the house until May 2025. For tax purposes, all of the expenses and the revenue from the sale will be reported on your 2025 tax return.
Because a flip is a short-term investment considered inventory, you also don't have to worry about complex concepts like capitalization or depreciation. Your profit is simply calculated by taking your gross revenue from the sale and subtracting all of your project expenses. This can be summarized by a very simple formula:
Resale Amount - All Project Expenses = Net Profit
This is exactly how FlipperForce’s Final Profit Statement is structured. It takes the resale amount and provides a detailed, categorized list of all your project costs—including the purchase, buying, holding, selling, financing, and repair costs—to give you a clear and accurate calculation of your final profit on the deal.
Let's use an example to illustrate. Say we bought a property in November 2024 and began renovations in December. The project takes us into 2025, and we don't sell the house until May 2025. For tax purposes, all of the expenses and the revenue from the sale will be reported on your 2025 tax return.
Because a flip is a short-term investment considered inventory, you also don't have to worry about complex concepts like capitalization or depreciation. Your profit is simply calculated by taking your gross revenue from the sale and subtracting all of your project expenses. This can be summarized by a very simple formula:
Resale Amount - All Project Expenses = Net Profit
This is exactly how FlipperForce’s Final Profit Statement is structured. It takes the resale amount and provides a detailed, categorized list of all your project costs—including the purchase, buying, holding, selling, financing, and repair costs—to give you a clear and accurate calculation of your final profit on the deal.
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It is important to note that this is different from a BRRRR (Buy, Rehab, Rent, Refinance, Repeat) deal, where the property is a long-term rental. For a rental property, you would need to capitalize and depreciate the value of the property over time.
While FlipperForce doesn't have long-term rental accounting features, our Final Profit Statement will provide you with the total capitalized basis—the total amount of money you've spent to get the property ready to be rented—which is a critical piece of information for your accountant.
Understanding and Filing Vendor 1099s
Beyond your project's profit and loss, one of the most important things you need to handle at the end of the year is your Vendor 1099s. The IRS requires you to file a Form 1099-NEC for certain independent contractors you've paid. This can be a huge pain point for flippers, especially when you're juggling multiple projects and contractors.
FAQ
Do I have to file a 1099 for every single contractor I pay?
That's a very common question, and the answer is no, but it’s important to know the specific rules. The general rule is you must issue a Form 1099-NEC to any eligible independent contractor to whom you’ve paid at least $600 for services in a single tax year.To determine if a contractor is eligible, you need to consider these factors:
- Independent Contractor Status: The business must be an independent contractor, not a W-2 employee.
- Business Structure: They must be a Sole Proprietorship, Partnership, or LLC. You do not need to issue a 1099 to a contractor who is a Corporation or an S-Corp.
- Payment Method: The payments must be made by cash or check. If you paid them using a credit card, debit card, or a third-party payment service like PayPal, you are not required to issue a 1099. The payment processor handles this for you by issuing a Form 1099-K.
- Compensation Amount: The total compensation paid must be $600 or more in that tax year.
PRO TIP
Manually tracking what you've paid to each contractor across all your projects can be an absolute nightmare. That's why we created FlipperForce's Vendor 1099 Report. This report automatically calculates the total compensation paid to each of your vendors across all your projects in a given year, giving you a clear, centralized list of who you need to file for. It's an accountant's best friend and a massive time-saver for you.
Preparing for Your Accountant
When it's time to meet with your accountant at the end of the year, having all your information organized is key to saving time and money. Here’s a checklist of the documents you’ll need to have ready:
- Final Profit Statements: For every project you sold during the tax year, have the FlipperForce Final Profit Statement ready. This will provide your accountant with all the necessary revenue and expense data.
- Vendor 1099 Report: Provide your accountant with a copy of your Vendor 1099 Report from FlipperForce so they can easily see who needs a 1099 and for how much.
- Capitalized Basis Report (for BRRRRs): If you've stabilized a property and held it as a rental, your FlipperForce report will give you the capitalized basis, which is the total value of all the work done to get the property ready for rent. Your accountant will use this number to calculate the ongoing depreciation.
- Proof of Expenses: While your FlipperForce reports are great, it's always a good idea to have a backup of your receipts and invoices. Since you've been using the Receipt Inbox tool, this should be an easy step.
Conclusion
Taxes don’t have to be a scary part of the house flipping business. By understanding the core accounting principles and having a system in place to track all your project finances, you can walk into your accountant's office with confidence and ensure you've captured every deductible expense.
FlipperForce was built to make this process as simple as possible. It centralizes all your financial data, from your project budget to your final profit statement and even your vendor payments, so you can focus on what you do best: finding, renovating, and selling great houses. Don't let disorganized records eat into your profit. Take control of your finances and set yourself up for a profitable flipping career.
FlipperForce was built to make this process as simple as possible. It centralizes all your financial data, from your project budget to your final profit statement and even your vendor payments, so you can focus on what you do best: finding, renovating, and selling great houses. Don't let disorganized records eat into your profit. Take control of your finances and set yourself up for a profitable flipping career.
