Many people approach real estate purchases with different goals. Some have the desire to earn quick returns. These people purchase properties with the intention of fixing and flipping – buying an inexpensive property fixing it up and selling it when the market is ripe for gains. Flipping can seem like a lucrative strategy, especially if you’re handy and can put your own sweat equity into the property, saving on your improvement costs.
However, if you do this frequently, you won’t be considered a real estate professional. Instead, flipping may be viewed as your trade and business and you will be classified as a broker/dealer. As such, you’ll be generating ordinary earned income doing this. It’s considered your salary, and this means paying regular income taxes, plus employment taxes, which have some of the highest tax rates. And as a broker/dealer, you can’t take advantage of passive losses or the real estate professional strategy.
Be sure to consult your tax advisor if you are flipping properties or are interested in doing so, in order to be sure of your tax obligations.
For more information see my book Loopholes of Real Estate.
About the Author
Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.