If you flip a house in less than 12 months, the IRS considers it a short-term capital gain, and the IRS will tax you at a higher tax percentage. On the flip side, if you flip a house over 12 months, the IRS will consider it a long-term capital gain, and the IRS will tax you at a lower tax percentage.
Tips on how to pay lower taxes:
1. Maximize your deduction. You will need to have accurate books to implement this strategy. To have an accurate and clean book, you will need to have in place the services bookkeeper whose responsibility will be to keep a meticulous record of your transactions in accounting software such as Quickbooks or Xero. At Servye, we provide a monthly bookkeeping service to business owners to help them save more and grow their businesses.
What accounting software do you use?
2. Never pay cash or make any under-the-table payments to contractors.
Be sure to get a w-9 form from all contractors reflecting the exact amount you paid to contractors.
3. Do flips that take longer than 12 months. This point is important because the IRS will consider this investment or NOI as a long-term capital gain/ investment.
4. 1031 exchange (like-kind-exchange) to defer paying taxes.
5. Live in the house you flipped to avoid paying taxes. We don’t usually recommend this approach because it can be a huge challenge to scale your business using this strategy.
6. Have a good bookkeeper and a good CPA who can help you strategize and help you reduce your taxes.
If you are a real estate investor and would like our help, schedule a free consultation with one of our Servye experts, and we will take care of you.