In today’s world, there are a lot of ways out there for trying to make some extra money. One of these is flipping houses. This involves a person buying a fixer-up house, performing repair and renovation work on it and then trying to sell it for a profit.
There are many things a person should make sure to be aware of when engaging in activities to bring in some extra income. One is whether the activities they are engaging in raise any special tax issues.
Flipping houses is among the economic activities that have unique tax considerations connected to them. There are a variety of things that can impact what kind of federal tax liability a person would end up having in connection to profits they make from house flipping, including:
- Whether they lived in the house they flipped. If a house a person flipped was their primary residence for a certain amount of time, they may qualify to have a certain amount of the profits from the home’s sale excluded from tax liability.
- How long they owned the house. The length of such ownership impacts what tax rates the profits from flipping a house would be subject to. When a house is flipped after less than a year of ownership, the profits from the sale typically fall under the short-term capital gains category. Meanwhile, the profits from houses flipped after more than a year of ownership are typically considered long-term capital gains, which have lower tax rates.
- How often they flip houses. If the Internal Revenue Service deems that a person flips houses often enough that it constitutes a business, they can face heftier tax liability for the profits from flipping.
The unique tax considerations related to any special economic activities a person does to make some extra money are among the things it can be important for a person to factor into their overall tax planning. Ignoring such special considerations could lead to a person missing out on tax benefits or inadvertently getting into trouble with the IRS. Skilled tax planning attorneys can help individuals who engage in house flipping or other special economic activities with the unique tax planning issues raised by their activities.
Source: philly.com, “Before you flip that house, study up on tax consequences,” Caitlin McCabe, July 20, 2017