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Many people have ventured into flip investment properties especially on New York Real Estate, because of the lure of quick cash. People from all walks of life have been enticed to buy houses for the purpose of reselling them at a profit. If done right, it can work and there is a decent profit to be had. However, prospective investors need to be aware of the tax consequences, which covers a flip property. Understanding the tax laws that govern the purchase and sale of flips will help an investor develop tax strategies that can reduce tax liability and personal liability. Below are some house flipping scenarios and the corresponding tax consequences.
Investment profit from the sale of a real estate is considered capital gain and is taxed at two levels depending on how long you own the property. When you hold onto the flip for a year or less, you face short-term gain that is taxed at ordinary tax rates that can go as high as 35%. By holding the flip for more than a year, your gain is treated as a long-term profit and is taxed at more favorable rates. In most instances, capital gain rate maxes out at 15%.
If you complete several house flipping transactions in a short time and will continue to do so well into the future, the Internal Revenues Services (IRS) will consider your transactions as a business or trade rather than as an investment strategy. In that case, you will be subject to state income taxes, federal income taxes and self-employment taxes. The self-employment tax is 15.3%. Federal income tax rates can be as high as 35%. State income taxes vary form state to state while other states have none.
Frankly speaking, the careful study of the tax laws can clarify the whole process of house flipping, making it clear, that there are legal ways to minimize and even in some cases do away with paying taxes.