Profiting in house flipping involves cutting costs as much as possible. The price buyers are willing to pay for it is limited, which is why you can’t merely increase the price whenever you wish. That said, you don’t need to stop making improvements to save.
You also don’t have to look for the cheapest contractor to reduce the costs — that could end up costing you more if you need to redo work. Additionally, you can learn from experience or accountants that you have tax benefits or tips you can apply to reduce costs.
One area where you can reduce costs, however, is taxes — if you know what you’re doing. Here are four tax tips for house flippers.
Best 4 Tips to Save on House Flipping Tax
1. Keep it a month longer, pay less
That’s right. Although the purpose of the house flipping business is to reform and sell a home as fast as possible, you can benefit from waiting a little longer. You can change from a short-term to a long-term capital gain.
But what is the difference, and why does it matter?
If you are looking to save money and can let a house stand for a year before selling, then this hint is for you. That happens because when you sell a property that you owned for less than 12 months, you must pay the short-term capital gain tax. It starts at 10% for low values (up to $9.5k).
Instead of paying 10-37% of your income, you can pay from 0% to 20% when it’s considered a long-term capital gain. To be qualified, all you need to do is to wait over a year to sell. That said, you don’t want to waste money on interest on your loans. If you can use the flipped house as your primary residence temporarily, you could save money on your own rent to make it worth it.
You can learn more about house flipping taxes by searching for specific websites.
2. The FICA Taxes
Those are the Social Security, Medicare, and Medicaid taxes that you must pay as a business owner or self-employed person, swallowing the massive percentage of 15.3%. If you combine with the Federal income tax, that’s a bunch of your profit gone away.
Fortunately, beginners who are just starting in the business might find a way through it. With the help of a professional accountant, you might be able to convince the authorities you are not someone working with house flipping as a daily business.
By doing so, you can skip it until you have more experience in the field. However, make sure to have a professional to support you. Also, if you do want to keep it as a simple extra for an indefinite amount of time, you can learn how to flip houses as a side hustle.
3. Making a 1031 exchange
Section 1301 of the IRS allows you to defer taxes if you take the profits from a sale and invest them in flipping another house. Therefore, you won’t pay taxes as you didn’t pocket the profit. The quickest way to do it is to use the money as a down payment for the next purchase.
At some point, you’ll have to pay the taxes, but if you do it every single time you sell a house, you’ll be losing money. Instead, invest it and think about the future, when you’ll be able to take all at once, perhaps with a long-term capital gain instead.
Each case may vary, and you’ll profit, in a symbolic way, if you research how to apply the 1031 exchange to a house flip. Use that in your favor whenever you can, and the conditions apply, in order to save money.
4. Tax benefits in deduction
When you can’t qualify for a tax reduction, or it isn’t enough, you can seek deductions. Labor and materials, flipping expenses in general, might be deducted from your taxes.
In order to benefit from all and each opportunity, you might have to consider having an accountant by your side. It involves an extra cost, but professionals can find deductions that you wouldn’t find by yourself.
For example, most beginners don’t think of taking vehicle and travel costs involved in visiting the property, or the mortgage interest involved in your loan. See, you should have a specialist helping you.
Despite all costs involved in repairing a home — from paying contractors to paying for interest on your fix and flip loans — most beginners don’t consider those related to taxes. In the end, the frustration of losing more than 1/3 of the profit surprises flippers who weren’t prepared.
Fortunately, that won’t be your case. You are already aware of some taxes applied to this type of business. Also, you may be able to reduce or deduct from them a value that will help you maintain some money to keep investing.
Now go and apply your know-how to the business.