Please see this answer from HalAl:
It depends on what activity you are doing as the taxation of "flipping" houses depends on how you are doing it. Examples:
- If you purchase one house and "flip" it for a profit, it is a capital gain. If sold in one year or less, it would be a short term gain. If sold after being held for more than one year it would be a long term capital gain and would be entitled to favorable capital gains rate treatment.
- If you purchase multiple houses and "flip" them for a profit (i.e. you are actively engaged in buying and selling houses) you may be engaged in a business. If you are, you lose the favorable capital gains rates and must pay self-employment tax on any profit. Bad news: the IRS has no specific criteria as to how many houses or how often you need to sell them to lose capital gains treatment.
- If you purchase houses, rehab or clean them up and then resell them, your profit is coming from "sweat equity" and would be business income, subject to ordinary income rates. After all, what you're doing is almost exactly the same as what a homebuilder does.
Unfortunately, the line between the different scenarios is not clear except in the extreme. The purchase and sale of one "flip" house would be a capital gain, the purchase and sale of multiple houses as your primary source of income would be a business.
