House flipping can be a smart investment, but you can also be hit with unexpected taxes if you plan on flipping properties. An understanding of what causes these tax hikes is what you need in order to avoid raised taxes.
The biggest hit you will take in taxes is a special tax that is applied to income properties. In most cases, you are able to sell homes with no tax on the sale. However, this tax-free sale is only if the home was your primary residence for years before the sale. Buying a house or other property with the plan of flipping the location makes the property an income property. The sale of an income property will be hit with taxes that can lower your overall profit.
Tax hikes for property flippers are mainly caused by time. If properties are being flipped too quickly and too many real estate transactions take place then the IRS will classify your actions as a business rather than an investment. Once your properties are listed as a business you will find higher tax rates on all of your transactions that quickly eat up your potential profit. Once you slow down your house flipping, be sure to keep precise records on your properties so that you can claim tax breaks when they are available.
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