Around the loan
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.
Short answer
A flip is normally taxed as ordinary income, often with self-employment tax on top, and it is generally not eligible for a 1031 exchange. If you modelled the deal at long-term capital gains rates, your after-tax profit is materially smaller than you think.
Why this belongs on a site about loans
Because it is the second-largest cost after the money itself, and it is the one people leave out of the model entirely. A deal that clears $30,000 before tax can clear far less after it, and by then the loan is repaid and the decision is unrecoverable.
The distinction that decides everything: dealer or investor
The tax treatment turns on whether the IRS regards the property as inventory held for sale or as an investment. Someone who buys, renovates and resells repeatedly looks a lot like a dealer in real estate, and dealer property is inventory.
| Treated as a dealer | Treated as an investor | |
|---|---|---|
| Character of profit | Ordinary income | Capital gain |
| Self-employment tax | Generally yes | No |
| Long-term capital gains rates | Not available | Available if held over a year |
| 1031 exchange | Not available - inventory does not qualify | Potentially available |
| Instalment sale treatment | Generally not available | Potentially available |
What actually drives the determination
No single factor decides it. The ones that get weighed include:
- How many properties you buy and sell, and how often.
- How long you hold each one.
- Your intent at acquisition - and contemporaneous evidence of it.
- How much you improve the property before selling.
- How you market it, and whether selling is a substantial part of what you do.
- Whether it is your main occupation or genuinely occasional.
The practical consequence for your model
Things worth asking an accountant before you buy
- Based on my activity, am I a dealer or an investor for this property?
- Will self-employment tax apply to this profit?
- Does holding it as a rental first change the analysis, and for how long?
- Should this be in an S-corporation rather than an LLC, and what does that cost to run?
- What estimated payments will I owe, and when?
- What should I be documenting now to support the position I am taking?