For many who are new to property flipping, it can come as a surprise that the IRS will usually regard your flipping activity as a trade or business, rather than a capital investment. As such, your flips are treated as inventory. So, why is it important for you and your CPA to understand these specifics? Simply put, the IRS taxes the profits you make from a “trade or business” as they would ordinary income. Furthermore, your net profits will be subject to self-employment tax on top of ordinary income tax rates! So, if your flipping activity is regarded as a trade or business by the IRS, taxes will take a rather large bite out of your profits. While you can’t wave a magic wand and change how the IRS treats your flipping activity and profits, you can enlist the help of a savvy CPA to track your money and plan for the future!

Any experienced landlord doesn’t need us to tell them that documenting everything is the key to successful tax planning. If you, like many other landlords or residential property investors, have your sights set on the goal of becoming a certified real estate professional, this is even more imperative. Not only should you document where your money is going, but track and record where your time is going. Document activities such as consulting with architects and contractors, site inspections, and interviewing potential tenants – these records can help demonstrate to the IRS that you are personally participating in managing your properties. Furthermore, even if you are perfectly content as a landlord, keeping track of your expenses will go a long way in helping you and your CPA tax plan.