Capital Gains Tax On Real Estate Flipping – Earn More!

Flipping Versus Capital Gains Rates

August 20, 2004
By Niles Brohey

Real estate flipping is the practice of buying a property (normally below market price) and then selling it on soon after for a quick profit. Generally those engaging in this practice will never take possession of the property – they will sell their sales contract to another party for cash. Large amounts of money can be earned in this way, mass buying and selling properties in short periods of time. However it is important to understand how this practice is subject to capital gains tax.

Capital gains taxes are applied to financial gains received from the sale or exchange of certain assets – such as real estate, businesses, or property. The rate of capital gains tax levied depends to a large extent on the length of time you have possessed the asset in question. The shorter the time - the higher the tax which has strong implications when considering capital gains taxes on real estate flipping.

If you sell a capital asset you have owned for less than one year you must pay capital gains tax at the same rate as you pay income tax. If however you have possessed the asset for a year or more the applicable rate of capital gains tax drops to between 5% and 15%. So clearly when you buy a property and sell it on in a very short period you will be eligible to pay a high rate of tax (the same rate as your income tax) on the net gain you make as compared to the tax on a longer term investment.

Relative to a general real estate or property speculator who might be expected to hold onto a property for a year or more, your tax burden will be quite high, unfortunately there is nothing you can do about this short of holding a property for a year or more which prohibits the practice of flipping! However by balancing the profits of real estate flipping with the high tax of short term capital gains tax large sums of money can be made.