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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Are there house flipping tax deductions?

Resolved Question:

What expenses can I deduct when flipping a house?

Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

Hi and welcome to JustAnswer!

When you purchase a house - your purchase price is the basis.

When flipping a house - the basis is adjusted - you add all purchase, sale and repair costs to the basis.

Your gain will be (selling price) - (adjusted basis).

Among others - you will deduct:

-mortgage interest

-insurance premiums

-recording fees with local authorities

-real estate fees

Let me know if you need any help or clarification.

Customer: replied 5 years ago.

Is it true, as a non U.S. citizen nor green card holder, I understand there is withholding tax when I sell a house that I previously flipped?

Expert:  Lev replied 5 years ago.

Expert: Lev replied 4 years ago.

Yes - that is correct.

if real properties are involved - a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. Generally, settlement officers are required to withhold 10% of the amount realized. Please see some information here -http://www.irs.gov/businesses/small/international/article/0,,id=105000,00.html

If withholding is more than your tax liability - you would need to file a tax return and claim a refund.

Please be aware that 10% FIRPTA income tax withholding is not applied to the sale price - but only to the amount payable to you.

Customer: replied 5 years ago.

I understand. So, let me give you an example:

I buy a house for 260k, I make a renovation of $70K and I sell it for $425K. What exactly do I pay in taxes?

Expert:  Lev replied 5 years ago.

Your expenses are $260,000 plus $70,000 = $330,000

If selling it for $425,000 - your gain is $95,000.

If that is occasional sale - and you are not in business of flipping houses - the gain will be added to your other taxable income and you will pay income tax based on your total income, filing status, deduction, etc. - see tax rate schedule on last page in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf

If you are single and that is your only income - your estimated federal income tax liability is $17,600.

If you held the property more than a year - the gain might be treated as long term capital gain taxable at reduced rate - not more than 15% - and your max tax would be $14,250

If you are in business of flipping houses - that income will be subject of self-employment taxes IN ADDITIONAL to income tax. The self-employment tax rate is 13.3% (for 2011) - so your estimated additional self-employment tax will be $12,635. In this case your total tax would be estimated as $17,600+$12,635=$30,000

Please be aware these are very raw estimates. To determine your exact tax liability, the tax return should be prepared.

Lev and 3 other Tax Specialists are ready to help you
Customer: replied 5 years ago.

I would like to know which way is better to do house flipping as a foreign person?

Should I do it on my personal name or should I establish an LLC?

Expert:  Lev replied 5 years ago.

For nonresident aliens - the issue is that without a proper authorization you are not eligible to work or be self-employed.

If you are an investor and occasionally purchase a house for resale and all renovation work is done by others - you have a capital gain on the sale and if the property is held more than a year - you will only pay federal income taxes on the capital gain.

That would be the most beneficial from tax prospective.

If you are in business of flipping houses - your only choice to do that legally without a work authorization permit would be to create C-corporation which would be a separate legal entity. C-corporation will hold properties. purchase materials and pay for renovations to subcontractors.

Customer: replied 5 years ago.

So what makes the difference between occasionally re-sale and a business of flipping?

Expert:  Lev replied 5 years ago.

There is no strict difference and all depends of circumstances.

Generally - number of properties and time you hold them before selling would be used as primary criteria.

If you re-sell one property in two years and hold it at least for a year - most likely - you are an investor.

If you re-sell three properties during the year and held them less than six months - most likely - you are in business.

Customer: replied 5 years ago.

I see. So, what you are saying is that if the house that I’m buying is for my family, I cannot renovate it myself? I must hire a contractor?

Expert:  Lev replied 5 years ago.

That is not correct - you may purchase the house for your family and renovate it by yourself - but you may not receive a compensation for your work if you do not have a proper work authorization.

In additional for some type of work - you do have to hire a licensed contractor - for instance for electrical wiring. You need to verify your state and city building code which works require that.

From tax prospective - all these would not matter - as long as you report all your income and pay all taxes - the IRS would not object.

Customer: replied 5 years ago.

You lost me. So, I am a non-resident alien, (am buying a house, I make the renovation myself together with some of my friend from U.S., I hire key contractors such as electrical: so after that, if I’m selling the house after six months of the original purchase time, I will pay 10% withholding tax and that's it?

Expert:  Lev replied 5 years ago.

Above you wrote - that house I'm buying is for my family, I cannot renovate it myself - that means you purchase a personal property and renovate it for yourself or your family.

Now you are telling - I'm selling the house after 6 months of the original purchase - that means you have a profit motive and your purchase the property either as an investment or a business.

If that is the only property you sell during the year - you might be able to treat it as an investment - and will pay only income taxes on capital gain.

If you are selling several properties - that is self-employment activity and in additional to income taxes - you will be liable for self-employment taxes. Having an LLC doesn't change your tax liability - but will be an additional evidence that you are in business.

Then - you are asking - I will pay 10% withholding tax and that's it?

Withholding is applied at the time of payment - that is not your tax liability. The tax liability is determined when you file your tax return. The purpose of withholding - to cover your possible tax liability. If the amount withheld is more than your tax liability - you will claim a refund. If less - you will pay additional taxes.

Lev and 3 other Tax Specialists are ready to help you
Customer: replied 5 years ago.

Okay thank you for your help!