Tax Consequences of Flipping that House
With the approach of the dreaded tax day, and in light of so many people getting into the real estate investing game with the current housing situation, I’m going to share some information regarding the tax consequences that can come about from selling a property in a “flipping” concept.
As housing prices have dropped, and more properties are available through bank foreclosures, more people are buying non-owner occupied properties and quickly selling them for a profit. “Flipping”, however, carries significant tax consequences.
Investors retaining their property for a year before selling have their profits considered a long-term capital gain and pay only a 15% rate. Those selling non-owner occupied investment property held less than 12 months are taxed at ordinary income tax rates, since it’s considered a short term gain. Subject to the seller’s tax bracket, the tax rate could be as much as 35%.
The IRS will prorate the tax owed for “unforeseen circumstances” such as death, divorce, legal separation, job loss, poor health or a single pregnancy resulting in multiple births. A limited exclusion may be granted if a natural or man-made disaster caused the sale of the house, or if it was obtained through eminent domain. Active duty military personnel may also get an exemption if located a specific distance from home for a fixed time period.
Section 1031 of the Internal Revenue Code offers another way to avoid this tax hit. According to Section 1031, if a seller replaces a non-owner occupied investment property with a like-kind (same or higher value) property, he will not be responsible for the income tax on the sale. An intermediary usually handles this transfer. The seller normally has 45 days to identify his replacement property and 180 days to complete the exchange.
For more information, you should consult a competent tax advisor.
