Need another reason to be cautious about “flipping”? Tax consequences. Many investors use 1031 exchanges to defer gains from the sale of a property when purchasing their next property. With “flipped” properties, the IRS may rule that flipping is a business and subject to ordinary income taxes instead of capital gains and that could mean added taxes and penalties for flippers who claimed a 1031 deferment.
If you do invest in real estate, flipping or otherwise, you must get solid tax advice from a qualified tax professional, preferably a Certified Public Accountant. Real estate agents and H & R Block tax preparers don’t qualify (though a real estate agent is at least theoretically required to tell you when you should seek a CPA’s advice).
With the market still hot, some amateurs are buying and selling properties too quickly, running the risk that the IRS may deem the transactions a person’s trade or business, with gains taxed as ordinary income and subject to self-employment taxes.
Novice real-estate speculators, especially those who attempt like- kind exchanges, should make sure they understand the rules before they’re ensnared in an audit, or forced to pay more than they bargained for come tax season.
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