How to Report Flipping a House on Your Tax Return
As a real estate investor, you may be aware of the tax benefits of flipping houses, but reporting them on your tax return can be a daunting task. In this article, we will guide you on how to accurately report your house-flipping gains and losses on your tax return, avoiding any potential penalties or issues with the IRS.
How to Report Flipping a House on Tax Return?
Before we dive into the details, let’s first identify what is considered a flipped house. A flipped house is a property that has been acquired, repaired, and then resold for a profit within a relatively short period. This activity is considered a hobby or business income and requires accurate record-keeping and reporting.
Gross Profit: Calculate Your Gain or Loss
When reporting the sale of a flipped house, you must calculate your gross profit, which is the difference between the sales price and the purchase price. The calculation is straightforward:
Sales Price – Purchase Price = Gross Profit
For example:
- You buy a house for $200,000 and spend $40,000 in repairs.
- You sell the house for $320,000.
- The gross profit would be:
- Sales Price: $320,000
- Purchase Price: $200,000
- Repairs: -$40,000
= $80,000 gross profit
Short-Term or Long-Term Gain/Loss?
As a real estate investor, you need to determine whether the sale of the house qualifies as a long-term or short-term capital gain or loss.
- If the property was held for one year or less, it’s considered a short-term capital gain or loss and is subject to ordinary income tax rates.
- If the property was held for more than one year, it’s considered a long-term capital gain and may be eligible for a lower tax rate (0%, 15%, or 20%).
For example, if the above sale resulted in a $80,000 profit, and you held the property for one year or less, the gain would be taxed as ordinary income. If you held it for more than one year, you would pay a lower rate based on your income tax bracket.
Other Expenses: Repairs, Improvements, and Property Taxes
As a flipped house investor, you may have expenses that can reduce your taxable income, including:
- Repairs: Amounts spent on renovating or repairing the property, such as kitchen upgrades, bathroom remodels, and interior/exterior improvements.
- Property taxes: If you paid property taxes while holding the property, you may deduct this amount on Schedule D.
Here’s a sample of reportable expenses:
| Type | Amount |
|---|---|
| Repairs | $40,000 |
| Property taxes | $10,000 |
Reporting Your Gain or Loss on Your Tax Return
To report your gain or loss, you’ll need to complete the following sections:
- Schedule D (Capital Gains and Losses): Report the sale of the flipped house on this section, including your sales price, purchase price, and calculated gross profit.
- Schedule E (Supplemental Income and Loss): Report your passive income and loss from rental activities on this section.
Additional Requirements:
As a real estate investor, you’ll also need to keep accurate records, including:
- Purchase contracts: Documentation of the purchase agreement, including purchase price, closing dates, and conditions.
- Repair estimates: Original estimates or contracts for renovation and repair work.
- Sale agreement: Copy of the sales agreement, including sales price and closing dates.
By accurately reporting your flipping activities, you’ll ensure that you comply with tax laws and minimize potential audit issues.
Conclusion: Accurate Record-Keeping is Key
In conclusion, reporting the sale of a flipped house on your tax return requires accuracy and attention to detail. Keep clear records of purchase, repairs, and sales transactions to ensure easy reporting on Schedule D and Schedule E. Familiarize yourself with IRS guidelines and deadlines to avoid penalties or issues.
Remember, as a real estate investor, accuracy is crucial to minimize audit risk and take advantage of available tax deductions. By following the steps outlined in this article, you’ll be better equipped to report your house-flipping activities with confidence.
Summary: Key Points to Report Flipping a House on Tax Return:
- Calculate gross profit by subtracting purchase price from sales price.
- Determine if the gain is short-term or long-term.
- Keep records of repairs, improvements, and property taxes.
- Report on Schedule D (Capital Gains and Losses) and Schedule E (Supplemental Income and Loss).
- Accurately maintain records and retain documents for at least three years in case of an audit.
By understanding how to report your house-flipping activities on your tax return, you can make the most of your income and minimize any potential issues with the IRS.