Flip profits are ordinary income; rental gains are capital gains with depreciation benefits along the way; and a 1031 exchange can defer the tax bill indefinitely. Knowing which bucket you are in changes what you keep. General information, confirm your case with a CPA.
KEY FACTS FROM THIS GUIDE
- Screen deals with: 70% of ARV minus repairs = maximum all-in price
- Verify ARV with renovated comps within 1 mile sold in the last 90 to 180 days
- Flip profits are ordinary income, often plus self-employment tax
- Roof, HVAC, foundation and rewiring are the four line items that break budgets
Flipping: ordinary income, plan for it
Flip profits are taxed as ordinary income, often plus self-employment tax, which surprises first-time flippers at rates approaching 40 percent combined. Entity structure (S-corp election at volume) and expense capture are the levers. Set aside the tax from each closing, not at year-end.
Rentals: depreciation is real money
Residential rentals depreciate over 27.5 years, sheltering a slice of rental income annually. Combined with mortgage interest, taxes, insurance and repairs, many cash-flowing rentals show paper losses, legally. Recapture comes due at sale (up to 25 percent), which is where the next tool matters.
Deals with verifiable numbers reach the list first. Written numbers, licensed title company closings, zero pressure.
The 1031 exchange
Sell an investment property, buy another of equal or greater value through a qualified intermediary, and both the gain and the recapture defer. Deadlines are brutal: 45 days to identify, 180 to close. Set up the intermediary before the sale closes or the option evaporates.
State layer: OH, TX, GA
Texas: no state income tax. Ohio and Georgia tax in-state rental income and gains, generally credited against your home state’s tax. Non-resident and international investors need an extra fifteen minutes with a cross-border CPA, cheap insurance.
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