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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29650
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 -,,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 -

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

Okay thank you for your help!