House flipping taxes. They’ve been on your mind lately. Especially since you’ve made the biggest flip of your life. It was a charming little home. All it took was one look and you knew it had potential.
Several months and one huge renovation later you were proved right. That charming little house earned you one handsome profit. And now Uncle Sam might ask for a cut.
So if you’re wondering about house flipping taxes, read on.
There are two types of income, passive and active.
There are two types of income that the government and IRS recognize: Passive income, and active income. Knowing the difference between the two is key to determining what taxes you owe. Below, we’re going to go over each type of income and how they affect you.
In basic terms, passive income is any income you earn from a business without actively being involved.
For instance, suppose you own a rental property. You’ve hired a management firm to handle the tenants. Management does everything from collecting rent to hiring maintenance teams. All you’re doing is collecting money each month. That’s passive income.
Or, say you invest in your friend’s new restaurant. They’ve handled the restaurant’s renovation and hired the chef and waitstaff. All you did was invest money. That’s passive income.
Like the name suggests, active income is income you earn by actively working for it. The paycheck you get form your job is considered active income because you actively earned it.
Active income can also be from a business you own. For instance, let’s say you want to open up a BBQ joint. You have a family BBQ sauce recipe ready to go and a place all picked out. Then your friend samples your recipe. They’re so hooked on it that they decide to invest and help.
You handle the renovations, the staff, and pretty much all the day-to-day stuff. Your friend spends less than 100 hours on some marketing campaigns.
Because you’re doing the majority of the work your income is active. Because your friend is only doing some light marketing, their income is passive.
Working with a CPA makes things easier.
“Okay,” you might be thinking. “What does this have to do with me? I’m flipping houses here, not BBQ steaks.”
There’s a reason the difference between active and passive income matters. If your income is active, you’ll have to pay 15.3% of your active income for taxes. These taxes help fund social security and medicare.
If you’re an employee of a business, your employer typically pays half of that while you pay the other half. If you’re employing yourself though fix and flipping, you’ll have to pay the whole tax yourself.
“Would I have to pay that tax for each house or for the year?” Good question! After each house sale, it’s recommended that you take 15.3% of that final sale and set it aside. You make the tax payments four times a year.
If this seems a little confusing we don’t blame you. At times taxes can seem needlessly complicated. So what can you do to simplily things?
One of the best ways to make things easy is to hire a CPA. They can answer all your questions and tell you what you should expect to pay come tax seasons.
They can also help you create an organized records system so you’ll be better prepared for taxes.
If you’re interested in fix and flipping and want to know more about house flipping taxes, look no further than Gauntlet Funding.
Gauntlet Funding offers the most competitive rates in the market for prime borrowers with no prepayment penalties. We are an organized and transparent system that will get you funded in little time after you have undergone the approval process! Contact Gauntlet Funding today at (631) 465-2161.
House Flipping Taxes: What to Expect | Gauntlet Funding-Melville, NY