The expenses you can claim when flipping a house are very similar to the deductions self-employed people deduct as common business expenditures. The difference lies in whether the Internal Revenue Service considers your house flipping a form of business or an investment, as the capital gains tax implications can vary. Depending on your situation, you may be eligible to deduct home office expenses, travel or other related expenses, but reaching out to a tax professional is recommended.
If you flip a house for investment purposes, you can deduct the purchase and repair costs from your profits for capital gains tax purposes. Home business, travel, advertising and other operational expenses can apply if you use the flipped house for business purposes.
House Flipping Expenditures
House flipping involves making capital expenditures to fix the house up and resell it. If you don't live in the home or you sell it in under a year, then capital gains taxes apply to any profits. However, the IRS does let you deduct expenses incurred related to purchasing and repairing the home. If you live in the home or own it for more than a year, you’ll be taxed at a lower rate on your gain. Expenses that can be deducted include home improvement materials and labor.
Home Business Expenses
If you’re using the house you’re flipping as a base of operations for your home-reselling enterprise, you can take advantage of specific home office deductions. You can typically deduct the rent or mortgage associated with a designated office space within the home and the utilities associated with that percentage of space. As of 2018, you can deduct a standard rate of $5 per square foot for your home office space, not to exceed 300 square feet. You can also deduct office supplies, equipment, designated phone and internet lines. Be aware, space used for purposes other than business are not qualified home office deductions.
Travel and Other Expenses
If you’re traveling as part of your house-flipping venture, you can typically deduct the cost of mileage on your vehicle as it directly applies to conducting business. You can usually also deduct plane travel and lodging expenses if directly related to business functions. Entertaining potential buyers by taking them out to dinner is also considered a business deduction. Any advertising you do as part of marketing the renovated property for sale, as well as realtor fees, are typically considered a deductible expense as well.
Flipping as Investment or Business
Like many tax issues, there’s not always a firm distinction between what constitutes a business versus an investment. Flipping a single house is usually considered an investment, while flipping multiple houses is typically viewed as an entrepreneurial business venture. For best results, it might be wise to consult a certified public accountant or tax professional to advise you on the best way to legally reduce your tax burden. Also keep detailed records and receipts, as these can be invaluable come tax prep time.
Lisa McQuerrey has been an award-winning writer and author for more than 25 years. She specializes in business, finance, workplace/career and education. Publications she’s written for include Southwest Exchange and InBusiness Las Vegas.