By If your first house-flipping project ended in a loss, don’t assume you’re limited to deducting only $3,000 per year. Depending on your specific facts, you may qualify to deduct the entire loss in the current year.
The key issue is whether the IRS views you as a real estate dealer or as an investor. Investors generally face the $3,000 annual limit on capital losses. Dealers, however, report their activity as a business, allowing losses to offset ordinary income in full. In many cases, dealer treatment can also reduce self-employment tax.
Qualifying as a dealer depends on more than the number of properties you have sold. The IRS and the courts look at your overall business intent and activities. Factors include why you purchased the property, the extent of your rehabilitation work, how quickly you marketed the property for sale, and whether you conducted the activity in a businesslike manner.
But dealer status is not always an advantage. If future flips generate profits, those profits become ordinary income rather than capital gains. Dealer property also does not qualify for Section 1031 exchanges or installment-sale reporting.
If you intend to build a house-flipping business, good records are essential. Maintain a written business plan, keep separate books and bank accounts, track your time, and consistently report the activity as a business from year to year.
If you want to discuss house-flipping, please call me on my direct line at 408-778-9651