Posted by David Krulac on April 30, 2000 at 20:18:16:
the capital gains rate for over 1 year is 20% wheras the ordinary rate is 28% for a lot of people and up to 39.6% for some. In the highest bracket capital gains is almost a 50% savings in federal income taxes. we just sold a property with a delayed settlement to catch the more than one year threshold.
And as Tom pointed out its not a good thing to be a dealer and lose capital gains treatment, lose seller benefit of instalment sales and to lose the ability to do 1031 tax free exchanges, all three are porhibited by a dealer!
David Krulac
Capital Gains AND Income taxes? - Posted by Jim (Alaska)
Posted by Jim (Alaska) on April 30, 2000 at 12:35:06:
Hi folks,
When you sell a house that you are flipping I know that there will be capital gains on it, right? But then do you have to pay regular income taxes on it also? I was just trying to figure what is going to have to come out of a deal I am working on and was not sure about this.
If you are flipping, there is no capital gains treatment. All of your profit is ordinary income and taxed at your marginal tax rate.
When you mention “flip” property, I assume that you mean property you bought to resell at a profit. This is different from investment property that is bought to generate cash flow.
For real estate, capital gains treatment only applies to your principal residence and to investment property held more than one year.
In the most common context, your “flip” property is not investment property and is considered dealer realty. The deal itself determines whether a transaction gets “dealer” treatment or investor treatment. You do not have to be a “dealer” for a transaction to receive “dealer” treatment, and, a “flip” transaction usually gets dealer treatment regardless of the holding period.
Consult your tax advisor for guidance specific to your circumstances.
Depends. If you own the house more than one year your profit is taxed at capital gains rate. If one year or less, then your profit is ordinary income. UNLESS you are a dealer. Then it’s all ordinary income, no matter what the holding period is.