Buying a house, renovating it quickly, and then selling it again isn’t as seamless as HGTV’s “Flip or Flop” and “Fixer Upper” make it look, and it’s important that you be prepared for the never-televised wonkier side of property investing — that is, taxes.
It’s not unusual to imagine that flipping houses would be fun. You might start by thinking that this could be the way to easy profits.
It’s an exciting venture, without a doubt, and one that, if done correctly, can bring you the kind of return on investment that you have been seeking. But buying a house, renovating it quickly, and then selling it again isn’t as seamless as HGTV’s “Flip or Flop” and “Fixer Upper” make it look, and it’s important that you be prepared for the never-televised wonkier side of property investing.
Which brings me to an always-dreaded subject: taxes.
I know, taxes are why we hire accountants. But studying up before a flip can save you from surprise later. Here are a few guidelines:
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The most important consideration in flipping, tax experts say, is how long you hold a property. If you retain the property for more than a year, federal law rewards you by treating any profit from the sale as a long-term capital gain. That means the tax rate on your profit is much lower, maxing out at around 20 percent for investors even in the highest-income tax bracket. For those in lower brackets, the rate could be lower — even 0 percent.
But if you flip in less than a year, tax rates are not in your favor. Money you make by buying and then selling that same property in less than a year is considered a short-term capital gain and is taxed at ordinary income-tax rates, which are much higher and can max out around 39 percent of your profit.
Yet the equation can get far more complicated than that, especially the more frequently you flip.
“What you should be mindful of … is whether or not what you’re doing could be considered purely an investment. Is (flipping) something you do in addition to your daily job?” said Bill Rucci, managing partner of Rucci Bardaro & Falzone, a Boston-area accounting firm, and someone who has spoken frequently on the subject. “ If the government can make the case that it’s more than just an investment, they will try to recharacterize the transaction as a trade or business. And how the profits are handled will be…