Taxes are one of the most confusing aspects of investing in or flipping real estate, and you will need to
plan in advance to make sure everything goes smoothly come tax season. Here we will go over the
differences between an Investor and a Flipper, as well as how taxes are applied to them respectively.

Difference Between an Investor and a Flipper

Working in real estate deals with large markets, often involving multiple subsets that range drastically in
their strategies and outcomes. Two of the major areas that people in the real estate industry often focus
on are investing and flipping. Therefore, it’s important to know the key differences between these two
strategies.
An Investor is someone who purchases a house as a long-term investment. Investors will likely rent out
the house to either short-term or long-term tenants and make money off of the subsequent cash flow
(the amount of money earned after all the expenses are paid for).
Flippers are individuals or teams who, in a short amount of time, buy a house, fix it up, and put it back
on the market for a higher price. They reap the rewards of the sale and then move on to the next flip.
The difference between Investors and Flippers is not only apparent in the way they manage their real
estate, but also in how their taxes are evaluated.

Investor’s Taxes

An individual who invests in a property with the intent to hold it for a long time, at least a year, only has
to pay the long-term capital gains rate as long as they aren’t classified as a dealer. This rate for Investors
is between 0 to 20 percent, which is substantially lower than the rates that Flippers are required to pay.

Flipper’s Taxes

Real estate flippers who complete multiple flips a year can expect CPAs to consider their real estate
strategy as a business, meaning that they will likely have higher income taxes as a result.
The IRS considers Flippers to be real estate dealers or traders, not Investors. Essentially, the IRS views
the flips as an active income, so the profits are categorized as regular taxable income; the tax rate for
Flippers varies between 10 to 37 percent. In addition to that, Flippers usually have to pay a self-
employment tax on top of that, which is an additional 15 percent.
In the rare case that a Flipper can avoid being labeled as a dealer, they too can enjoy capital gains rate. If
they flip a house in less than a year, they will pay a short-term capital gains rate, which is the same as
regular taxable income, but without the self-employment taxes. If the Flipper holds the property for
more than a year, they can be eligible for the same long-term capital gains rate that an Investor would
have.

Tax Deductions

Both Investors and Flippers can receive a variety of tax deductions through their real estate business.
Both parties can write off renovation and labor costs, home office spaces, travel expenses, and much
more. That is why it is vital to have a quality and trusted CPA to guide you through the tax process and
save you as much money as possible.

Do you have any follow up questions? would you like to learn more about this topic? please comment below.