Flipping houses? Know your tax status first
Two flippers can make the same profit and pay very different tax. Whether the IRS sees you as a dealer or an investor drives most of it.
Profit from flipping is usually taxed as ordinary income when you are considered a dealer: someone who buys property mainly to resell. Dealer profit can also owe self-employment tax. An investor who holds a property for more than a year can get long-term capital gains rates instead. Your intent, frequency and holding period decide which one you are.
Dealer or investor?
| Dealer (typical flipper) | Investor | |
|---|---|---|
| Property is treated as | Inventory | A capital asset |
| Profit taxed as | Ordinary income | Capital gain (long-term if held over a year) |
| Self-employment tax | Usually yes | No |
| Holding costs | Added to the cost of the property | Depend on use; often capitalized |
| 1031 exchange | Not available | Available for investment property |
The IRS looks at the whole picture: how many properties you sell, how long you hold them, how much work you do, and how you describe your business. There is no single bright line.
Costs that belong in the deal
For a dealer, the purchase price, renovation costs and holding costs during the project, such as loan interest, property taxes, insurance and utilities, generally become part of the property's cost and reduce the gain when it sells. Tracking them by property is the difference between paying tax on profit and paying tax on revenue.
Structure and timing
- Entity choice: many active flippers use an S-corporation to manage self-employment tax
- Estimated taxes when a flip closes, using the annualized method for lumpy income
- Separating long-term rentals from flips, so a hold does not get treated as inventory
- Year-end timing of closings
Common questions
Is flipping a house taxed as capital gains?
Usually not, if you flip regularly. Most frequent flippers are dealers, and their profit is ordinary income that may also owe self-employment tax. A property held as an investment for more than a year can qualify for long-term capital gains rates.
Can I deduct holding costs on a flip?
For dealers, holding costs during the project are generally added to the cost of the property rather than deducted right away, which lowers your taxable profit when the property sells. Keep records by property.
Should my flipping business be an S-corporation?
Often, once profits are steady. Paying yourself a reasonable salary and taking the rest as distributions can reduce self-employment tax. Jerome compares the numbers before you elect.
It's always tax time. Let's get ahead of it.
Tell me what is going on with your taxes or your business. A short call is usually enough to know the next step.