Flipping Houses Gains Is It Capital Gain or Ordinary Income?

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Education & Training with Alexandria Louis Tax Solutions LLC

The short answer is it depends.  It depends on what exactly?  I’m glad you asked.  We will look at it in two distinct ways.

Alex Tax has a full-time job as a tax professional.  He earns $85,000 a year in this role.  Alex has always enjoyed real estate, particularly bringing neglected properties back to life.  Alex purchases about two houses a year to breathe new life into them and sale at a gain.  Alex averages a gain of $15,000 to $20,000 per sale.  Alex does everything under his personal name because it is purely something he does for fun. 

Louis Tax is Alex’s brother.  Louis is a serial entrepreneur.  Louis has a real estate LLC that has rentals and he regularly flips houses under the company.   Louis flips three-five properties a year.  Flips make up the majority of the LLC’s revenue.

Alex’s flipping income is considered investment income.  Why? Alex’s main income to support himself comes from his job.  Alex’s intent is to do this as a hobby and investment.  Because the amounts made are not his substantial income the transaction is considered investment income subject to capital gain taxes.

On the other hand, Louis is in the business of flipping houses.  His income is considered ordinary income subject to self-employment taxes.  The key in these scenarios is the intent to which the income was made.  Now there are some other factors that could change Alex’s income from capital gains to ordinary income, but we will save that for another time.

Feel free to contact us if you have any questions regarding the classification of your house flipping income.

 

Alexandria Louis Tax Solutions – A boutique tax firm in Memphis, TN

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