6 Year-End Tax Tips for Fix and Flip Investors
If you own real estate as an investment—whether you own one income property or this is your full-time business—there are some year-end tax tips that you will want to follow. The decisions you make now can have a major impact on your taxes when it comes time to file next year.
The first tip for all real estate investors is not to do your own taxes. Unless you are extremely experienced with tax laws and handling your own taxes, you should trust a skilled tax advisor to help you navigate all the complexities that come with investment real estate ownership. From capital gains taxes to property taxes, you want to make the right tax planning decisions to minimize tax liabilities and maximize your returns.
In this article, we are going to focus on year-end tax tips for fix and flip investors. If you are flipping houses as a hobby or as a living, here are some helpful tax planning tips to keep in mind before this year comes to an end:
1. Understand Your Inventory
No matter how big your house flipping venture is, the IRS will likely treat it as a business and will consider any property you flip as “inventory.” Of course, how if and how your business is legally structured will make a significant difference, as well. This means it is a capital asset that can be bought or sold. The reason this is important is because business income is treated as ordinary income and your profits can be taxed at a much higher rate than maximum capital gains taxes from a personal real estate sale. Your income can be offset by net operating losses, while self-employment income is never netted against capital gains or losses.
2. Don’t Close at the Very End of the Year
You may want to consider waiting to sell the property until after the new year (or at least make sure the closing date is after January 1). It all depends on when you want to deal with the tax liabilities of an investment real estate sale. If you’d rather have them on this year’s taxes, then you can try to close before the end of the year. If you want to push them off for another year, then wait.
3. Buy Your Materials Now
On the flip side (pun intended), you will want to buy your renovation materials before the end of the year. This will give you more to write off as business expenses. You can pay contractors in advance and purchase any raw building materials now for bigger tax deductions.
4. Make Repairs Before the End of the Year
Any repairs you can get done before the end of the year will benefit you come tax season. Whatever time, money and resources you are able to invest now will help you have more losses and expenses to deduct on this year’s tax return. However, you will also want to understand what the IRS considers “repairs” and what they consider “improvements.” A repair can be deducted in full immediately. An improvement may have to have the cost depreciated over several years. This usually affects landlords more than flippers, but it is something you need to research and understand when dealing with investment property tax planning.
5. Get Property Inspections Done Soon
You will also want to have any property inspections done that can be. You may be able to take the service cost deduction this year.
6. Get Your Documents in Order
The end of the year is a time when you should be getting all your documentation, expense reports and accounting ledgers in order. Don’t wait until taxes are due to gather your receipts and figure out your financial earnings and losses from an investment property. Do all of that now. This will help you be more prepared when it comes time to file your taxes and it will also help you get a better idea of what you might owe or get back when you do file.
Next week, we will cover year-end tax tips for landlords and buy and hold property owners. Stay tuned.
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