Dealer status, inventory accounting, self-employment tax on the margin, and the entity split between flips and holds.
Flipping houses is a business, not an investment, and the code taxes it that way. Properties bought to renovate and sell are inventory. The profit is ordinary income with self-employment tax on it. No 1031 exchange, no installment sale, no long-term capital gain. Most rehabbers find this out on their first big year.
The plan accepts dealer treatment where it applies and organizes around it. An S corporation with a reasonable salary limits self-employment tax to the salary. Projects are accounted for as inventory so costs land against the sale they belong to. Any property you intend to keep sits in a separate holding entity from the start, so the rentals get investor treatment and the flips do not contaminate them. A retirement plan funded from a strong year, and the timing of closings around year end, do the rest.
We review three years of returns and the project ledger, model the entity structure, and write the plan with the accounting method and the entity split documented before the next purchase.
What we typically see: Every project in one LLC with the rentals. Flip profit on a Schedule C with self-employment tax on all of it. Renovation costs expensed as they are paid. A hold that was a flip on paper.
Each one is modeled against your numbers and written into the blueprint with the documentation it needs.
Three flips and two rentals in the same LLC. Separating them was the first year the rentals were taxed like rentals.
No. Property held primarily for sale is not eligible. Properties you hold and rent can qualify, which is why the two belong in separate entities.
For a dealer, yes, on the net profit. An S corporation with a reasonable salary limits it to the salary. The rest is distributed.
For a flip, when the property sells. Costs are capitalized into the project as inventory. Deducting them as paid overstates the loss in one year and the gain in the next.
Yes, and the intent should be documented at purchase and the property held in the rental entity. Converting a completed flip is possible but harder to defend.
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