3 Tax Mistakes New House Flippers Make

A home flipper needs to be in accordance with applicable laws, and that includes tax obligations. Most people new to the business ignore this aspect until they finally have to calculate how much they owe.

Letting it sit for as long as possible isn't the way to go. Once you figure out how much of your profit is going to the tax authorities, you'll wish you would have thought about it sooner.

To avoid any fines or to adjust the price according to your obligations, you should avoid common tax mistakes that most new flippers make. Fortunately for you, you will read the three main pitfalls you should avoid in the business.

Let's get started.

Top 3 Pitfalls in Tax Management for House Flippers

1.  Not understanding your qualification 

When someone sells their principal residence, they have the right to exclude up to $250,000 from their gains. However, the requirements for such a reduction doesn't apply to house flippers.

You'd need to have it as the primary residence for at least two years in the past five years. As any home flipper works with several houses and sales within that same period, it wouldn't apply.

Now that you know that this marvelous exclusion doesn't apply to your business, you still need to know your place. Those who buy, renovate, and then sell homes within one year can have their gains considered as a short-term capital gain. The issue here is that you could be taxed up to 37%.

As for carrying out the same deal with frequency, then you could be considered a real estate dealer, diminishing the taxes to something around 15.3%, applicable to earnings up to $132,900 in the current year of 2019.

These expenses, along with others such as interest on your fix and flip loan, can add up quickly. So it’s critical you know what to expect and have a plan in place to afford it all.

2. Not keeping documents and bills    

House flippers who deal with one or two contractors don't have many invoices to keep. However, those who hire lots of different service providers and have to maintain bills from all sort of stores have some work to do.

Not properly saving all those documents for later can be a problem if the authorities decide to audit you. You could have to pay for fines that you weren't expecting.

Besides always stating the truth in your financial statements and tax returns, make sure to keep all the proofs with you. It's actually an obligation for any individual and business, but some rookies in the market might ignore this fact.

There are some efficient ways to organize your real estate documents. Every effort is valid to avoid paying more than you were expecting to.

3. Not seeking professional help 

It's not only the house repair and fixtures that demand specialists. Once you start making house flipping a business, you need an accountant like any other company, unless you are one yourself.

Even when you think you know something, it's important to consult a professional. In this case, someone with knowledge on tax and accounting aspects of running such a business.

The first benefit is that you'll have more time to think about how to profit from house flipping. You'll have someone else figuring out the best ways to work out the financial issues and obligations.

Also, you'll not risk skipping a valuable way to reduce the amount of money you need to pay the authorities. Not to mention missing a deadline and paying fines with a high percentage for not being careful enough.

Those are enough reasons to consider it, while not doing so have been the mistake of many new house flippers. Fortunately, you won't be one of them. 

Final Thoughts 

In any business you learn with your mistakes, fail a few times, until you can say you have enough experience to avoid losing money. With the internet, you can also get the same knowledge without suffering. Good luck with it!