If an investor is categorized by the IRS as a “dealer,” the profits from property flips will be taxed at their ordinary income tax rate. The profit is calculated by subtracting the expenses, including the purchase price, from the final selling price. Tax brackets range from 10% to 37% for “active investors” earning active profits.
According to the IRS, a real estate dealer purchases real estate and sells it to customers “in the ordinary course of his or her trade or business.” Most fix-and-flip investors are considered dealers; they hold their properties short term and the majority of their income is derived from flipping houses. Even real estate investors who occasionally flip houses are typically considered dealers and are taxed at ordinary income rates.
If you’re classified as a dealer, the profit from a flip will be taxed at your prevailing ordinary income rate. Currently, ordinary income tax rates range from 10% to 37%. In addition, the profit is subject to self-employment tax (the self-employed person’s equivalent to FICA), which is 15.3%, double what you typically pay as a W2 employee.
as a dealer the reporting will be on schedule c. technically you are in a partnership with your spouse. but as long as the property was not held in an LLC there is an out to filing a partnership return. if you qualify by not be an LLC you elect to be taxed as a qualified joint venture. each of you files a schedule C to report your share of the profits or loss
A qualified joint venture is a joint venture that conducts a trade or business where:
The only members of the joint venture are a husband and wife who file a joint return.
Both spouses materially participate in the trade or business, and
both spouses elect not to be treated as a partnership.
Unfortunately, most of the home flipping expenses are not immediately tax deductible. Instead, they must be capitalized into (i.e. added to) the basis (the original value) of the property. Capitalized costs include:
The cost of the real estate itself
Direct materials
Direct labor
Utilities
Rent
Indirect labor
Equipment depreciation
Insurance
Production period interest (ie mortgage interest)
Real estate taxes allocable to each project
