Understanding Taxes on Fix and Flip Properties
The real estate market is moving at a rapid pace, and many real estate investors are taking advantage of the fix and flip strategy.
However, there are many hindrances that these investors face, the major one being funding. Investors that intend to buy properties to fix and flip often need a big capital outlay to renovate the houses before they can flip them to gain a profit.
The Best Financing Options for Fix and Flip Loans
Renovating and flipping properties requires a lot of money, and various loans can provide investors with financing to purchase the property, carry out repairs, pay the contractor and broker fees.
Flipping a real estate requires intense work but the rewards are often worth the trouble and selecting the best strategy goes a long way in generating high profits.
Investors rely on hard money loans to fund the purchase and fixing of properties. Usually, fix and flip investors utilize these loans to buy, fix, and sell the property within a year.
Hard loans do not demand as many qualifications as other financing options to gain approval, and they can take a matter of days to be approved.
To acquire one, investors need to meet the following criterion:
• Have enough liquidity for down payment, interest payments and carry costs
• A good, but not necessarily perfect credit score
• Have the right contractor, real estate agent, etc on its team
• Previous fix and flip, real estate and/or construction experience
Borrowers with a longer history of fix and flip projects have higher chances to qualify for fix and flip loans and they will qualify for relatively higher borrowing limits.
Just like any other financing option, hard money loans have requirements. They include a 6-12 months loan term, interest rates of between 8 and 16 percent, lender fees up to 2 points, typical closing costs and repayments are done on a monthly basis. The loan repayments are interest-only payments and principle is paid at the end of the loan term.
Hard money loans are issued by hard money lenders, and they can be found in-person or on online platforms. Lenders on online platforms carry out transactions through the internet with a process that is relatively fast unlike the traditional lenders who are found via industry relationships such as referrals.
Taxes on Fix and Flip Properties
The real estate market has progressively flourished, and flipping houses is now trending. A lot of people and companies have shown interest by purchasing houses that have been foreclosed so that they can renovate them and sell them for a profit.
This has proven to be a lucrative investment, but you have to watch out for crucial tax aspects.
Any fix and flip investor needs to be knowledgeable of two tax classifications:
• Real estate dealer, and
• Real estate investor
The investors reap the profits while the dealers pay normal income tax rates. Therefore, an investor pays minimal taxes. If you are buying foreclosed properties, renovating, and selling them to gain profit, then you are an investor in the fix and flip industry.
On the other hand, a dealer is one who buys and sells properties on a frequent basis. The dealer, therefore, pays a higher tax than the investor does.
Once the Internal Revenue Service concludes that an individual is a fix and flip dealer rather than an investor, his real estate operation is regarded as a separate entity.
Due to this categorization, the individual’s net income is subject to the 15.3 percent self-employment tax, and it is treated separate from the ordinary income tax rate.
Let Orchard Funding Help
Don’t have enough money to start a flipping business? Don’t worry, Orchard Funding is here to help. We provide flippers with loans to help them get into the fix & flip market.
Submit your loan application today and get a loan within 24 hours or less. For more information, call us today at (310) 356 – 7373.