Help! I Have Tax Debt from Flipping a House. What Do I Do Now?

Flipping houses can be an exciting and profitable venture. Transforming neglected properties into beautiful homes not only revitalizes neighborhoods but can also yield substantial financial rewards.

However, many house flippers find themselves facing unexpected tax debt, turning a dream project into a financial nightmare. Understanding why this happens and how to address it is crucial for anyone in the business.

Why Does Tax Debt Happen in House Flipping?

1. Capital Gains Tax: The most common tax issue flippers face is capital gains tax. When you sell a property for more than you paid for it, the profit is considered a capital gain. If the property was held for less than a year, this gain is taxed at a higher short-term rate, which can be as high as 37%. For properties held longer, the rate is typically 15% or 20%.
2. Self-Employment Tax: Many house flippers operate as sole proprietors. In this case, profits from flipping are considered self-employment income, subject to self-employment tax in addition to regular income tax. This can significantly increase your tax liability.
3. Lack of Proper Deductions: Properly tracking and claiming deductions can reduce your taxable income, but many flippers fail to do this effectively. Expenses such as renovation costs, property taxes, insurance, and interest on loans are deductible, yet they are often overlooked or improperly documented.
4. Overlooking State Taxes: Each state has its own tax regulations, and some impose additional taxes on capital gains. Flippers focusing only on federal taxes may be surprised by a hefty state tax bill.

Solutions to Manage and Reduce Tax Debt

1. Tax Planning: Engage in proactive tax planning. Consider the timing of your flips to benefit from long-term capital gains rates and strategize your sales to minimize tax impact.
2. Proper Business Structure: Structuring your business correctly can reduce tax liabilities. For instance, forming an LLC can offer tax advantages and liability protection.
3. Track All Expenses: Meticulously document all renovation costs, travel expenses related to the project, and other deductible expenses. Use accounting software or hire a professional to ensure nothing is missed.
4. Payment Plans and Settlements: If you find yourself with a significant tax debt, don’t panic. There are options such as installment agreements or offers in compromise that can make the debt more manageable.
5. Hire a Tax Professional: Working with a tax resolution expert like Ben Butterfield of BPB Tax Resolutions can help you navigate complex tax laws, identify all possible deductions, and develop a strategy to minimize your tax burden.

Flipping houses can be lucrative, but it’s essential to be aware of the tax implications and take steps to mitigate potential liabilities.

At BPB Tax Resolutions, we specialize in helping individuals like you navigate the complex world of tax debt.

Contact BPB Tax Resolutions Today

If you’re struggling with tax debt from house flipping, don’t wait until it spirals out of control.

Let us help you find the best solution to your tax problems so you can focus on your next big flip with confidence.

Call Ben Butterfield at BPB Tax Resolutions today at (402) 779-7399 for a free consultation!