Around the loan
The three requirements every hard money borrower hits and nobody explains: how flip profits are taxed, what insurance the lender demands, and why the loan needs an LLC.
A hard money loan does not arrive alone. Before it closes you will need an entity and a specific kind of insurance, and after it repays you will owe tax on a basis that surprises most first-time flippers.
None of these is really about the loan, which is exactly why they are covered so badly. They are also where deals get delayed and margins quietly disappear.
How flip profits are actually taxed
Most people budget for the loan and not for the tax. Flip profit is usually ordinary income, not capital gains - and a 1031 exchange generally will not save you.
Often missedThe insurance your lender will require
Builder's risk and vacant-property cover, why your normal homeowner's policy will not do, and the mortgagee clause that holds up closings.
Delays closingsEntity structure: why the lender wants an LLC
What the entity actually does for you, what it does not, and why a business-purpose loan almost always needs one.
Do this early
The order to deal with them
- Entity first, before you are under contract - formation, EIN and a bank account take longer than people expect and a lender cannot close to an entity that does not exist.
- Insurance next, from the day the term sheet is signed. Ask for the exact mortgagee clause wording immediately.
- Tax before you buy, not at filing time. The dealer-versus-investor question is decided by facts you create at acquisition.