Today TaxMama hears from Geri in North Carolina, who asks, “What can you tell me about flipping Houses? Is this a Schedule C Business, or Schedule D? There is a lot of different information out there, about how to handle flipping houses for tax purposes.”
Actually, Geraldine,
You don’t use either of those schedules. If you’re flipping houses, that means you’re buying a house, fixing it up, then doing a 1031 exchange.
In that case, if you do it right, there’s no gain or loss to report at all. You simply need to report the event on Form 8824 https://www.irs.gov/pub/irs-pdf/f8824.pdf .
Be careful to ensure that you comply with all the rules involving tax-free exchanges. You can read about them here, in Chapter One of IRS Publication 544.
https://www.irs.gov/publications/p544/ch01.html#d0e2029
To avoid paying any taxes at all, avoid ending up with ‘boot’. Boot is when you end up with cash, or the equivalent of cash, anywhere in the buy or sell process. For instance, that can happen if you don’t cover the selling costs (escrow fees, agents’ commissions, etc.) out of your own pocket – allowing the buyer’s down payment to pay those costs. Or if the mortgage on the house you sell is higher than the mortgage on the one you replace it with.
Boot can get pretty complex – and so can 1031 exchanges – more complex than I can explain in a few minutes, here. I suggest that if you’re going to be doing much of this, you find yourself a tax professional who really understands the intricacies of 1031 exchanges, who can run the numbers for you before each flip, to ensure that you avoid all taxes. There are some tricks to making this work – and still being able to get cash out. An experienced professional will know how to do this for you.
And remember, you’ll find answers to lots of questions about 1031 exchanges and other tax information, free. Where? At TaxMama.com
[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips, too. Please click on the subscribe link and join us.]- Ask TaxMama :: Where taxes are fun and answers are free
- TaxQuips :: The number ONE tax podcast online
- IRS Form 8824 :: Like-Kind Exchanges
- IRS Publication 544 :: Section on Like-Kind Exchanges
- Lisa Vander’s Book :: The Real Guide to Making Millions Through Real Estate: Start Your Portfolio With as Little as $3000
File Download (0:00 min / 1 MB)
