According to ATTOM Data Solutions, the number of homes flipped in 2020 was down from 2019, but gross profit was up nationwide from $62,188 to $66,300. “While flipping activity declined, gross profits and profit margins went up. Profits rose in 2020, but profit margins dipped – the third straight year that returns on investments declined.”
Low interest rates, low inventory, and competition in the real estate industry from big players like Zillow, have made it harder to find an inexpensive home to buy and flip in today’s competitive housing market. The National Association of Realtors “Summary of February 2021 Existing Homes Sales Statistics” reports a decline in sales for homes for in less than $250,000, a sharp increase in sales of homes greater than $500,00 and a median sales price of existing home at $313,000.
Whether your house flip is part of a larger business or an individual investment, keeping your eye on the bottom line is crucial to coming out ahead. Detailed record keeping and a separate checking account for each project will help you take advantage of any deductions and tax advantages available.
From the H&R Block’s article “Taxes for Flipping Houses” if you are operating as a business most of the home flipping expenses are not immediately tax deductible. Instead, they must be capitalized into (i.e. added to) the basis (the original value) of the residence. Capitalized costs include:
- Fee and commissions paid to professionals such as lawyers, accountants, and real estate agents
- The cost of materials, labor, permits, and purchase price of the house, interest on you loan, equipment depreciation, and insurance
- Business expenses such as travel, vehicle wear and tear, office expense (rent, utility, supplies)
Normally, if you purchase a piece of real estate to fix up and sell it at later date, the profit is taxed under the capital gains rules. Amanda Han, from Bigger Pockets states if you continually purchase, rehab, and resell homes, the IRS will consider real estate as inventory, not capital assets. Operating as a business with the profits treated as active income and subject to self employment taxes and higher taxes.
Knowing what the pitfalls are and retaining an accountant specializing in real estate can help you stay ahead of the game.