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3 Tax Tips for Real Estate Flippers

1. Keep flips separate from long-term investment properties.

Real estate flipping is a very different enterprise than long-term investing. Buy-and-hold landlords benefit from “passive” income rules for rents and favorable capital gains treatment. Flipping, on the other hand, is a short-term “active” pursuit similar to self-employment. Mixing the two endeavors together in the same entity could prevent you from enjoying the tax benefits of either.

2. Set up a retirement plan.

Although you may not be able to avoid the self-employment tax, you may divert some of your pre-tax earnings toward retirement plans. There are many, many variables to consider, but the limits and allowances are fairly generous. Take a look at self-employed 401(k) “solo-k,” SEP IRA, and SIMPLE IRA plans.

3. Pay yourself a salary.

While S-corporations are not the tool of choice for landlords, they can help take the bite out of self-employment tax for real estate flippers. If you pay yourself a reasonable salary, complete with payroll FICA tax withholdings, any earnings above your salary are not taxed as self-employment income. Instead, the income above your salary is a gain on your investment. It’s still taxed – but much less than your active income.

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