Did you know? The average house flipper spends about $50,000 on renovations and carrying costs per project – and many miss out on valuable tax write-offs hidden in those costs.
What expenses can you deduct when flipping a house? In short, just about every expense directly related to your flip can reduce your taxable profit if you handle it correctly. From the purchase price and rehab materials to loan interest and even marketing costs, savvy flippers know how to turn project spending into legitimate tax deductions, cutting their tax bill and keeping more profit.
- 🏠 All Eligible Write-Offs: Learn exactly which house flipping expenses – from acquisition to sale – can be written off or added to your cost basis to minimize taxable profit.
- 💡 Federal Tax Rules Explained: Understand how the IRS classifies house flips (business vs. investment) and why it matters for ordinary income vs. capital gains taxes and self-employment tax.
- 🌎 State-by-State Tax Differences: Find out how flipping taxes vary by state, including which states hit flippers with the highest taxes and which have no income tax, in a comprehensive chart.
- 🚩 Avoid Costly Mistakes: Discover common errors (like misclassifying expenses or missing deductions) that even seasoned flippers make – and how to avoid IRS red flags when filing your taxes.
- 🔍 Pro Tips & FAQs: See real-world examples, compare different flipping scenarios, get definitions of key tax terms, and read quick Q&A answers to the most frequently asked flipping tax questions.
Mastering Federal Tax Law: House Flipping Expense Deductions Explained
Flipping houses has boomed thanks to HGTV stars and investor forums, but the IRS plays a huge role behind the scenes. U.S. federal tax law determines how and when you can deduct flipping expenses. The key lies in whether your house flip is treated as a trade or business or just an investment. This classification affects everything from which expenses are deductible to how your profit is taxed.
Trade or Business vs. Investment: Why Classification Matters
For tax purposes, a house flipper can fall into one of several categories:
- Professional “Dealer” (Trade or Business): If you flip houses regularly or full-time for profit, the IRS likely views you as running a business. In this case, properties are treated as inventory, not long-term investments. Profits are taxed as ordinary income (at your regular tax bracket) and may be subject to self-employment tax (15.3% for Social Security and Medicare). The upside: as a business, you can deduct many expenses on your Schedule C (Profit or Loss from Business) and fully write off any losses against other income.
- Occasional Investor (Investment Activity): If you only flip a house infrequently or as a one-off, you might be viewed as an investor rather than a dealer. The house is a capital asset in this scenario. Profits could qualify as capital gains (usually short-term if you held the property less than a year, taxed at ordinary rates anyway, or long-term if over a year, eligible for lower capital gains rates). Importantly, capital gains are not subject to self-employment tax. However, as an investor you typically don’t “deduct” expenses in the same way – instead, your expenses get rolled into the property’s cost basis, reducing the gain when you sell. And if you incur a loss on an investment flip, it becomes a capital loss (which has limitations: it can only offset capital gains plus up to $3,000 of other income per year).
- Personal Residence (Homeowner Flip): Some flippers use the strategy of living in a house while renovating, then selling. If you owner-occupy the home for at least 2 of the 5 years before sale, you can potentially exclude a large portion of the gain from taxes altogether (thanks to the homeowner exclusion under Internal Revenue Code §121 – up to $250,000 of gain for single filers or $500,000 for married couples). In this scenario, your renovation expenses aren’t deducted annually; they increase your basis, but if your gain is fully covered by the exclusion, those costs effectively reduce or eliminate taxable gain. This approach turns a flip into a personal home sale with tax-free profit, but it requires living in the project for a couple of years.
Why does this classification matter? It changes how you deduct expenses:
- A dealer (business flipper) can claim many ongoing expenses as business deductions and will treat renovation costs as inventory costs (deductible against sales revenue).
- An investor will mainly benefit from expenses by adding them to basis and subtracting them from the sales price as part of the gain calculation (no current-year write-off during the project).
- A homeowner flipper might not need deductions if the gain is excluded, but still needs to track expenses for basis in case the profit exceeds the exclusion or the exclusion doesn’t fully apply.
In all cases, good record-keeping is essential. The IRS and tax courts have denied deductions where flippers couldn’t prove expenses or weren’t truly engaged in a business. (For example, in a 2014 Tax Court case Ohana v. Commissioner, an aspiring house flipper’s expense deductions were disallowed because he hadn’t actually established an ongoing flipping business – mere intent wasn’t enough.)
From Purchase to Sale: Every Deductible Expense in a Flip
So, what expenses can you deduct when flipping a house? Essentially, any ordinary and necessary expense related to acquiring, fixing up, holding, and selling the property can offset your income from the flip. However, you must follow IRS rules on timing. Here’s a breakdown of common house flipping expenses and how they’re handled:
- Purchase Costs: The price you pay for the property is not immediately deductible. It forms the basis of your investment. Likewise, closing costs at purchase (like title fees, recording fees, inspections, and legal costs) aren’t expensed right away. Instead, they get capitalized – added to your property’s basis. You get the benefit when you sell: a higher basis reduces your profit. (If you’re a dealer, the purchase price is treated as the cost of inventory.)
- Renovation and Repair Costs: All those materials (lumber, paint, fixtures) and labor (contractor payments, subcontractors like plumbers and electricians) go into improving the house. These are typically capital expenditures – they add value or extend the life of the property – so you don’t deduct them in the year incurred. Instead, they increase the basis (or inventory cost). When the house sells, these costs come out of the sales proceeds as part of your cost of goods sold or basis, thereby reducing taxable gain. In practice, this means you do get to write them off, but only at the end when the flip is sold. (Note: Minor repairs or maintenance that don’t add significant value might be currently deductible for a rental property, but in a flip context nearly everything is part of the project cost.)
- Carrying Costs (Holding Expenses): While you own the property, you’ll have ongoing expenses. Property taxes, insurance premiums, utilities (water, electricity, gas), homeowners association dues, and maintenance are all costs of holding the property. If you’re flipping as a business, the IRS often requires capitalizing many of these carrying costs into the project’s basis under the “uniform capitalization” rules (applicable when producing or constructing property).
- For example, interest on a loan used to acquire or rehab the property is usually capitalized as part of the project cost (often called “construction period interest”). The same goes for property taxes paid during the renovation period – they typically add to basis rather than being a current deduction (unlike property taxes on a rental or personal residence, which might be deductible in the year paid). The result: these expenses will still reduce your taxable profit, but only when the property is sold. One exception: if you have carrying costs not directly tied to a specific property (say you’re holding two projects and have general holding expenses), small taxpayers might have some flexibility under certain thresholds to currently deduct some interest or taxes – but in general, plan to capitalize these.
- Selling Costs: When it’s time to sell the flipped house, you’ll incur realtor commissions, advertising and staging costs, and closing costs (title insurance, escrow fees, transfer taxes). The good news is that these costs directly reduce your taxable selling price. In tax terms, you don’t “deduct” them on a schedule; instead, you subtract them from the sales proceeds in calculating your gain. For instance, if you sell a flip for $300,000 but pay $18,000 in real estate agent commissions and $5,000 in closing fees, you would report only $277,000 as the amount realized. Effectively, those selling expenses are fully deductible against the sale price. Staging expenses or marketing costs might also be treated as ordinary business expenses if you incurred them separately; either way, they reduce profit.
- Administrative & Overhead Expenses: Not every cost in a flipping business attaches to one property. Office expenses (like office rent, a portion of your home used as an office, phone, internet, supplies), business insurance (liability insurance, for example), professional fees (legal and accounting services), and marketing or lead generation costs are generally deductible as current business expenses for dealers. Similarly, vehicle expenses for driving to project sites, hardware stores, or client meetings can be written off. You can deduct mileage at the IRS standard rate (e.g. around 65¢ per mile in recent years) or actual auto expenses if you use a vehicle for your flipping business. Even meals or limited entertainment related to the business (meeting a potential investor or grabbing lunch for your crew) can be partially deducted (typically 50% of meal costs, if properly documented). The key is that these overhead costs are ordinary and necessary for running your flipping enterprise. If you’re not a full-fledged business (just doing one flip), some of these may not come into play – for example, a one-time flipper wouldn’t typically take a home office deduction or advertise for projects – but a serious flipping operation will have many of these general expenses.
- Tools, Equipment, and Depreciation: Many flippers purchase tools or even heavy equipment (like a trailer, truck, or specialized machinery). If these are used in your business, you have a couple of options. Small tools and supplies (drills, paint sprayers, saw blades) used up in the project can be counted as part of project costs. Bigger equipment or vehicles that have a useful life beyond one project are considered business assets.
- You generally capitalize them and depreciate over a period of years. However, federal tax law is very friendly to businesses here: you might use Section 179 expensing or bonus depreciation to write off the full cost of equipment in the year purchased. For example, if you buy a $3,000 table saw or a $40,000 pickup truck for your flipping business, you could potentially deduct the entire cost in the purchase year (even if the truck will be used for many projects). Depreciation and Section 179 deductions are powerful ways to get immediate write-offs for business assets. (If you’re an occasional flipper treating the project as an investment, you likely won’t have business equipment to depreciate in the same way – these benefits apply to active businesses.)
In summary, at the federal level, a house flipper can deduct:
(a) All direct project costs (purchase, improvements, carrying costs, selling costs) – but usually at the time of sale via basis/cost of goods sold.
(b) All indirect business costs (office, travel, professional fees, etc.) – in the year incurred, if you’re running a flipping business.
Timing Your Deductions: Capitalize or Expense?
It’s important to understand the timing of these deductions. New flippers are often surprised that they can’t simply deduct everything in the year they spent the money, especially if the house hasn’t sold yet. The general rule is:
- If an expense contributes to the production or acquisition of the property (making the house ready to sell), it must be capitalized into the asset’s basis. No immediate deduction.
- If an expense is part of running your business but not tied to one property (for example, a seminar on flipping or a general marketing campaign), it can often be deducted immediately as a business expense under IRC Section 162 (ordinary and necessary business expenses).
Example: Suppose you spent $150,000 on buying and rehabbing a house in 2025 but didn’t sell it by the end of 2025. For tax purposes, that $150,000 isn’t a deductible loss or expense on your 2025 return – it’s sitting on your books as the cost of inventory (or an investment in the house). Once you sell in 2026, say for $200,000, you will deduct that $150,000 against the $200,000 sale (leaving $50,000 profit to be taxed). In contrast, if you also spent $2,000 on travel to scout potential flip properties and $1,500 on a real estate workshop in 2025, those could be currently deductible in 2025 as business expenses (assuming you’ve established that you are indeed in the business of flipping). If you were only doing a one-time flip, some of those “start-up” or educational expenses might not be deductible at all if you haven’t actually begun a business.
Tip: Once you’re actively flipping, you might qualify for the 20% Qualified Business Income (QBI) deduction on your flip profits (thanks to the Tax Cuts and Jobs Act). This deduction allows eligible business owners to deduct 20% of their qualified business income. For flippers classified as dealers, flip profit reported on Schedule C usually counts as QBI – meaning you effectively pay tax on only 80% of that profit (subject to income level phase-outs and other limitations). Investors who are just reporting a one-time capital gain don’t get this break – another reason being a bona fide business can pay off.
Pros and Cons of Business (Dealer) vs. Investor Status
To visualize some differences, here’s a quick comparison of treating your flip as a business (dealer status) versus as an investment:
| Flipping as a Business (Dealer) – Pros | Flipping as an Investment – Pros (Business’s Cons) |
|---|---|
| Immediate expense deductions for overhead (advertising, travel, home office) each year. | Lower tax rates on long-term gains (if you hold >1 year) and no self-employment tax on profit. |
| Losses from flips are ordinary losses, fully deductible against other income (no $3k cap). | Simpler tax handling for one-off flips – just report sale on Schedule D, and fewer record-keeping requirements (no separate business schedules). |
| May qualify for the 20% QBI deduction, reducing the effective tax rate on business income. | Potential to use 1031 exchange or homeowner exclusion if circumstances allow (not typically available to dealers holding inventory). |
| Can contribute flip profits to tax-advantaged retirement plans (SEP-IRA, Solo 401k) because it’s earned income. | Less IRS scrutiny on occasional sales (a one-time flip is less likely to be audited as “unreported business income”). |
(In other words, what’s a pro for one status is often a con for the other. For example, the dealer pays SE tax but can deduct more; the investor avoids SE tax but has limits on deductions.)
Most small flippers actually don’t formally choose – the IRS decides based on your facts. The number of flips, your intent, frequency, and involvement level all factor in. If you flip 5 houses a year, advertise for deals, and have an LLC named “Quick Flip Homes LLC,” you’re clearly a dealer. If you rehab one house every few years on the side, you’re likely an investor for that deal. Keep in mind, you don’t necessarily want to force one status or the other; just be aware of the implications of how your flipping is characterized and plan your tax strategy accordingly.
Real-World House Flipping Tax Scenarios: Examples & Deductions
Let’s bring this to life with a few common scenarios. Below is a comparison of three typical house flipping situations and how expenses/deductions work in each:
| House Flipping Scenario | How Deductions Work in This Scenario |
|---|---|
| Full-Time Flipper (Dealer Business) – Example: Jane flips 4 houses a year as her full-time business. | Taxes: Profit taxed as ordinary income (and self-employment tax applies). Deductions: All rehab costs (purchase, materials, labor, utilities, etc.) are capitalized into each property’s inventory cost and deducted against sales when sold. Ongoing business expenses (office, marketing, vehicle, insurance) are deducted annually on Schedule C. If Jane’s project loses money, the loss is an ordinary loss offsetting her other income. |
| Occasional Flip (Investment Sale) – Example: John flips one house as a side investment while working a day job. | Taxes: Profit treated as capital gain – short-term if held <12 months (taxed at regular income rate), or long-term if >12 months (eligible for lower capital gains tax rate). No self-employment tax since it’s not an active trade. Deductions: John doesn’t deduct expenses during the flip. Instead, his purchase price and renovation expenses become his cost basis. When he sells, he subtracts the total cost (purchase + improvements + holding costs) from the sale price to calculate taxable gain. Selling costs (agent commissions, closing fees) directly reduce the sale proceeds. If the flip results in a loss, it’s a capital loss (which can offset John’s other capital gains, or up to $3k of regular income per year, with the remainder carried forward). |
| Live-In Flip (Primary Residence) – Example: Sara buys a fixer-upper, lives there and renovates for 2 years, then sells. | Taxes: Profit can qualify for the home sale exclusion (Sara, single, can exclude up to $250k of gain from tax). Any profit above that is taxed as capital gain. No self-employment tax because this was a personal residence sale, not business inventory. Deductions: During ownership, Sara cannot deduct renovation costs or personal bills as “business” expenses. All her improvement costs add to the home’s basis. At sale, those costs reduce the gain. (If her profit is fully within the exclusion, those costs simply ensure she accurately calculates the gain but won’t be needed to offset tax, since the tax is zero.) She can’t deduct the value of her own labor, and personal housing expenses (mortgage interest, property tax) are only deductible under normal homeowner rules, not as flip expenses. |
As these scenarios show, the mechanics of “deducting” flip expenses differ widely. A full-time flipper will operate like a business with annual write-offs and cost of goods sold. A casual investor simply reports a net profit (after basis) on a Schedule D. And a live-in rehabber is leveraging a special tax exclusion rather than business deductions. It’s crucial to identify which bucket you fall into before you file taxes, so you can take the right approach and maximize your savings.
State-by-State Differences in House Flipping Taxes
Federal tax law is uniform across the U.S., but state taxes add another layer. Each state can tax flip profits differently (and some not at all). Here are some key state differences that house flippers should know, illustrated in a comprehensive chart:
| State | State Income Tax on Flip Profit | Notable State-Specific Considerations |
|---|---|---|
| Florida, Texas, Nevada, etc. (No income tax states) | 0% – No state income tax on flip earnings. | Only federal tax applies, which is a big advantage. However, these states often have high property taxes and other costs. (For example, Texas has significant property taxes that increase holding costs, though those taxes are fully deductible as business expenses.) |
| California (high-tax state) | Progressive rates up to 13.3% on ordinary income. Flip profits taxed at normal state rates (no special capital gain rate in CA). | Flippers pay some of the nation’s highest state taxes. If you flip as a business, California also charges an $800 minimum franchise tax for LLCs or corporations annually. Note: CA doesn’t conform to federal bonus depreciation or high Section 179 limits – large equipment write-offs may be limited on the CA return. |
| New York (and NYC) | State rates up to ~10.9%; New York City adds up to 3.876% for city residents. | Profits from flips in NY can face hefty combined state and city taxes. NYC flippers in particular should budget for ~14% tax on top of federal. Also, NY (and NYC) impose real estate transfer taxes at sale (~0.4% state and up to 1.425% city) – a closing cost which reduces your profit but counts as a deductible selling expense. |
| Illinois (flat tax state) | 4.95% flat state income tax on all income (no distinction for capital gains). | Simple tax calculation due to the flat rate. Flip income is taxed at 4.95% regardless of amount or holding period. Illinois doesn’t have local income taxes on wages, but property taxes are high in some areas (raising carrying costs). |
| Pennsylvania (flat tax state) | 3.07% flat state income tax. | PA’s income tax is low and flat, making flips relatively tax-efficient. However, Pennsylvania (and many municipalities) levy transfer taxes when you sell real estate (often around 2% total, split between buyer and seller). That transfer tax on a flip is essentially part of your selling expenses (deductible against the sale proceeds). |
| Massachusetts (unique capital gains rates) | 5% on regular income, but 12% on short-term capital gains. | Massachusetts taxes short-term capital gains (assets held <1 year) at a higher 12% rate. So a quick flip treated as an investment sale could face 12% state tax. However, if you are deemed a business (ordinary income), it’d be taxed at the normal 5% rate – an odd quirk where being a “dealer” could actually save state tax. (Long-term gains >1 year are 5%.) |
| No-Income-Tax States (WA, SD, AK, WY, etc.) | 0% state income tax. | These states don’t tax personal income or capital gains, so your flip profit escapes state income tax entirely. Still, consider other taxes: e.g., Washington has a business & occupation (B&O) gross receipts tax on business revenue that might catch house flippers operating as entities, and all have sales tax that increases material costs. In any no-tax state, ensure you still plan for federal taxes which will apply. |
| New Jersey (high-tax state) | Progressive rates up to 10.75%. | NJ taxes flip profits as ordinary income under its graduated income tax. Additionally, New Jersey requires withholding of estimated tax at closing if you’re an out-of-state seller of NJ property (to ensure taxes get paid). Flippers in NJ also pay notable realty transfer fees on sales. |
| Ohio (state & local taxes) | 3.99% flat state tax (as of 2025). Some cities impose local income tax (~2%–3%) on residents. | Ohio recently moved to a flat ~4% tax. If you live or operate in certain cities (like Columbus, Cleveland, etc.), local income tax could apply on your business profits. Always account for local taxes if you flip in a city with its own income tax. |
Using the Chart: State taxes can significantly impact your net profit from a flip. In states like Florida or Texas, you only worry about the IRS. In California or New York, a big chunk can go to the state as well. Always report your flip profit to the state where the property is located (that state has the primary taxing right on real estate sales). If you live in a different state, you’ll typically file a non-resident return for the flip’s state and your home state return will give you a tax credit for the tax paid elsewhere. This usually prevents double taxation, but you still might end up paying the higher of the two states’ rates.
Also, keep in mind states generally follow federal definitions of income and deductions, but may have their own tweaks. For instance, some states cap or disallow certain federal write-offs (like bonus depreciation) or have special incentives if you invest in particular zones. It’s wise to consult a tax professional who knows your state’s rules, especially if you flip houses in multiple states or are moving between states.
Costly Tax Mistakes House Flippers Should Avoid
Even experienced flippers can run into tax trouble. Here are some common mistakes and misconceptions to steer clear of:
- Mistake #1: Not Treating Flipping as a Business When You Should. If you’re doing multiple flips or plan to, you need to operate like a business. Some beginners fail to register a business or keep separate accounts, then try to deduct expenses without showing a legitimate business. The IRS may disallow your deductions if you can’t demonstrate that you’re engaged in an actual trade or business. Tip: set up a separate bank account and maintain good bookkeeping for your flips. If you want legal protection and a formal structure, consider an LLC or S-Corp – though an LLC itself doesn’t give tax advantages, it helps establish that you’re running a business.
- Mistake #2: Deducting Expenses in the Wrong Year. A frequent error is attempting to write off all renovation costs immediately. For example, someone might spend $20k on a kitchen remodel in December and try to deduct it that year, even though the house isn’t sold. That deduction isn’t allowed until the property is sold (since it’s part of the asset’s cost). Deducting it too early can get you in hot water if audited. Always distinguish capital expenditures from current expenses.
- Mistake #3: Forgetting to Track Basis Adjustments. Basis is everything in a flip. If you don’t track every dollar you put into the property, you might end up overpaying taxes by understating your basis. Commonly missed additions to basis include permit fees, dumpster rentals, tool purchases or rentals, and the portion of your property taxes or interest that should be allocated to the project. Keep all receipts and maintain a project ledger. If the project spans many months, use accounting software or a simple spreadsheet to track each property’s costs line by line.
- Mistake #4: Assuming House Flipping Profits Can Be Tax-Deferred. Many new flippers have heard of 1031 exchanges (like-kind exchanges) or think reinvesting proceeds into another house will avoid taxes. The reality: 1031 exchanges are NOT available for flips held for resale. Like-kind exchange tax deferral only applies to investment property held for rental or business use, not property held primarily for sale. Similarly, you generally can’t defer recognition of flip profit by immediately buying another flip – the IRS wants its tax once you sell. Don’t bank on deferring the tax bill (unless you convert the property to a rental or use the primary residence exclusion strategy). Plan for taxes in the year you sell.
- Mistake #5: Not Setting Aside Money for Taxes (or Underpaying Estimates). Flipping can produce large, lump-sum profits. It’s tempting to celebrate a big sale and reinvest all your cash, but remember the tax man. If you have a profitable flip, you may need to send the IRS and state an estimated tax payment during the year. Failure to pay quarterly estimates on significant profits can lead to penalties at tax time. A smart move is to set aside at least 20%-30% of your net profit for taxes (more if you’re in a high-tax state or if self-employment tax applies). Consult your CPA about making estimated payments to cover the liability and avoid surprises.
- Mistake #6: Mixing Personal and Business Expenses. You cannot “deduct” the value of your own labor in a flip. Some folks try to pay themselves a management fee or account for sweat equity – but you can’t take a tax deduction for paying yourself. Similarly, keep personal expenses out of the business. The new sofa you bought for your living room is not a flip expense (whereas staging furniture for a flip property could be, but document that it was for the project and not for personal use). Co-mingling personal and business items not only risks losing deductions, it can also jeopardize the liability protection of your LLC if you have one. Keep clean records and only deduct legitimate business expenses.
- Mistake #7: Ignoring Depreciation Recapture on Flip-to-Rent Strategies. A more advanced pitfall: say you decided to rent out a flip for a year or two (maybe the market was slow, or you wanted long-term capital gains treatment). Remember that any depreciation you claimed while renting is subject to recapture tax when you sell (taxed up to 25%). Some investors forget to account for that and are caught off guard by the extra tax. The flip-to-rental approach can still yield tax benefits (long-term gain rates, cash flow in interim), but you must plan for depreciation recapture in your sales projections.
- Mistake #8: Not Consulting a Tax Professional. Tax law is complex, and strategies like using an S-Corp to reduce self-employment tax or optimizing the timing of income and expenses can save you thousands. One costly mistake is not getting advice from a CPA or tax advisor experienced in real estate. A professional can ensure you’re taking all allowable deductions (for example, maybe you qualify for a home office deduction or can expense certain start-up costs) and that you’re meeting all requirements. Their fee is often itself a deductible expense – and it can pay for itself by optimizing your tax outcome and helping you avoid pitfalls.
By avoiding these mistakes, you’ll keep more of your hard-earned flip profits and stay out of trouble. Each flip is both a construction project and a financial transaction – so give as much attention to your tax strategy as you do to your renovation budget.
FAQ: House Flipping Tax Deductions
Q: Can I deduct renovation and repair costs immediately, or do I have to wait until I sell?
A: No. Most rehab costs must be added to the property’s basis and effectively deducted when you sell (they reduce your profit then). You generally can’t write them off in the year paid.
Q: Do I need to pay self-employment tax on my flip profits?
A: Yes – if you’re actively flipping as a business, your net profit is subject to self-employment tax (≈15.3%). No – if it’s a one-time investment sale, you avoid self-employment tax.
Q: I flipped a house as a one-off investment. Can I deduct the utilities, insurance, and loan interest I paid while holding it?
A: No. For a one-time flip, carrying costs (utilities, interest, etc.) increase your basis or reduce the sale proceeds – lowering your gain. You won’t list them as separate deductions on a tax return.
Q: If I flip my primary residence, can I avoid paying taxes on the profit?
A: Yes, possibly. If you own and live in the house for at least 2 years, you can exclude up to $250k (single) or $500k (married) of profit from capital gains tax. This makes a live-in flip very tax-efficient.
Q: Will forming an LLC or S-Corp let me deduct more expenses for flipping houses?
A: No. The range of deductible expenses remains the same. An LLC or S-Corp can provide legal protection or other benefits. An S-Corp might reduce self-employment tax on large profits by paying you a salary, but it doesn’t create new deductions beyond what a sole proprietor could claim.
Q: Can I deduct the cost of tools, equipment, or a truck I bought for my flipping business?
A: Yes. Assets like tools, machinery, or a work vehicle used in your flipping business are deductible. You’ll either depreciate these costs over their useful life or use special tax provisions (like Section 179) to expense them in the first year.
Q: If I lost money on a flip, can I write off the loss?
A: Yes. You can deduct a flip loss. As a business, it’s an ordinary loss (fully offsets other income). As an investment, it’s a capital loss (offsets capital gains; up to $3k/year of any remainder can offset other income).
Q: Will I be taxed by two states if I flip a house out-of-state?
A: Yes. The state where the property is located will tax the flip profit. Your home state may also tax it, but it typically grants a credit for taxes paid to the other state, preventing double taxation.
Q: Is house flipping income considered “passive” income?
A: No. Flipping profits are treated as active earned income, not passive. That means you cannot offset flip income with passive losses from other investments – the IRS views flipping as an active trade or business.