Property flipper taxes and deductions

This is the misunderstanding that costs the most money in property. A flipper is a dealer, not an investor. The properties are stock, so the profit is ordinary income, not a capital gain, not eligible for the lower long-term rates however long you held it, and not eligible for a like-kind exchange to defer it. Self-employment tax applies on top if you trade as a sole proprietor or a partner, though not to an S-corporation shareholder's share.

Because the properties are stock rather than assets, you get no depreciation while you hold them, and renovation costs are not deductible as you spend them, they attach to the property and come off when it sells. A rehab running across a year end can produce a tax bill on a project that has not yet paid you anything. Dealer status is decided property by property rather than for you as a person, so the same investor can hold rentals that do qualify for long-term rates alongside flips that do not.

The rest of the property flipper deduction list

Ordinary and necessary business expenses, deductible in full in the year you pay them, provided they are genuinely for the business:

Property purchase, as cost of goods sold
Renovation costs
Holding costs
Loan interest
Liability insurance
Payments to contractors
Permits and licenses
Marketing

Worth knowing

Flipping is a trade, not an investment: the profit is ordinary income with self-employment tax on it, and none of the capital gains treatment applies.

That is what is specific to this trade. The larger deductions are the universal ones, see the full checklist.

What each deduction is worth to you

On $100,000 of profit with no state income tax, $1,000 deducted saves $305, 30.5%, because it comes off self-employment tax and income tax together:

Net profit	Saved per $1,000 deducted	Effective
$40,000	$231	23.1%
$100,000	$305	30.5%
$200,000	$297	29.7%

The last row is worth less than the one above it, and that is not a mistake: past the Social Security wage base the self-employment part of the saving drops from 15.3% to 2.9%, and the higher income-tax bracket does not quite make up the difference. A deduction is worth most in the middle.

Add a state income tax and every row rises. The 1099 calculator applies that layer.

Where this comes from

The rules on this page that are specific rather than general are cited below. Follow a link to read the provision itself rather than taking our word for it:

Property held for sale to customers is not a capital asset, so no long-term rates and no like-kind exchangeIRC 1221(a)(1); IRC 1031(a)(2)
Dealer status is decided property by property on the factsMalat v. Riddell, 383 U.S. 569 (1966)

What these words mean

Sole proprietor: Someone who works for themselves without forming a company. The default if you started working for yourself and never registered anything, you and the business are the same legal person for tax.
Depreciation: Spreading the cost of something long-lasting, a vehicle, a camera, a tractor, across the years you use it, rather than deducting it all at once.
S corporation election: Asking the tax office to treat your company as a pass-through, so profit is taxed to you rather than to the company. The owner takes a salary and the rest as a distribution, which is what saves payroll tax.

General information about how these deductions work, not tax advice. Whether a particular expense is deductible for you depends on facts this page does not have, check with a tax professional before claiming anything listed here.