If you are a real estate investor, house flipping would be a lucrative business model. However, you must understand that profitability hinges on managing tax implications properly. You can face a significant loss if there are any missteps in tax planning. Thus, staying informed about tax liabilities and opportunities for deductions becomes essential. If you are considering house flipping as a new venture into real estate, this guide will help you understand the tax deductions and scheduling payments.
Understanding House Flipping and Its Tax Dynamics
When you are house flipping, partnering with Columbus Property Solutions can help you find undervalued or distressed properties to renovate and resell at a higher value. You would indeed gain substantial earnings, but along comes specific tax obligations, which are based on the duration of property ownership and classification of the investment. Reviewing the tax rules, you can quickly maximize profit and avoid costly mistakes.
Leveraging Tax Deductions for House Flipping
Some ways to leverage tax deductions for house flipping:
- Key Tax-Deductible Expenses
Along with providing overall profitability, tax deductions can also reduce your tax liability. The most common deductible expenses are acquisition costs, renovation materials costs, mortgage interest, utility expenses, labor costs (where the payment can be direct or indirect labor), and other business operations fees. They also include travel expenses, office supplies, and Real Estate taxes incurred during the ownership of the property.
- Tax Benefits of Forming a Limited Liability Company
You can gain additional tax advantages while operating the house flipping business under an LLC structure, such as pass-through taxation, and here, profits are taxed at individual rates, ditching the corporate rates. It also simplifies the deduction processes associated with business-related expenses. Thus, when you seek assistance from Hogan Small Business Tax CPA, you can utilize these deductions and fully adhere to tax regulations.
Understanding Tax Liabilities for House Flippers
Let’s delve into some of the tax liabilities for house flippers:
- Tax Payment Schedule
When you are opting for house flipping profits, they require timely tax payments. Thus, if you gain more than $1,000 annually through flipping business, you must pay the taxes quarterly in January, April, June, and September. However, if, due to low earnings, you opt out of quarterly payments, then the annual tax filing becomes mandatory.
- Tax Timing
You have to pay the taxes on flipped property the year the property will get sold. So, even if you bought the house in 2023, and sell it in 2024, the tax liability will be applicable to the 2024 return. Thus, if you want to navigate through and ensure compliance with federal and state tax laws, you must consult with a Certified Public Accountant.
Calculating Taxes for House Flipping with Expert Assistance
To determine the tax liability, you need to calculate the profitability for each flipping project, which can involve the After-Repair Value (ARV,) repair costs, and the final earnings after the deduction of all expenses. Tax professionals can assist in estimating the rates of taxes on short-term capital gains and long-term capital gains. They can also accurately calculate the tax based on your specific business model. They can also help you to focus on growing your real estate by streamlining your operations for sustained success.
