What to Expect from Uncle Sam

Flipping homes can be a great way to earn extra money for retirement, college tuition, or any number of financial goals. One key to maximizing the return from your flips is knowing the numbers: rehab costs, holding costs, cost of funds, and cash requirements, to name a few. The reality is that the numbers don’t stop there. To fully understand the finances of your flip you also need to consider the tax implications of the project’s profit.

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Generally speaking, the IRS categorizes personal income into two buckets: passive income and active income.

  • Passive income is income that comes from business activities in which you are not an active participant. Think investment income here.
  • Active income is income that comes from salaries, 1099 commission income, stocks and bonds, and interest income.

Federal law mandates that active income is subject to a 15.3% tax, known as FICA, to help fund Social Security and Medicare. When you receive income on a W-2 basis, like you would from a normal job, the employer is required to pay half of that and the employee pays the other half. Income earners that work as a subcontractor or own their own small business must pay the entire 15.3% on their own.

Passive income, on the other hand, is not subject to the 15.3% FICA tax.

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Why should a flipper care about the difference between active and passive income and FICA? Well, the implications can be substantial.  

House flipping income is generally considered active income. That means that the profits from a flip can be subject to the 15.3% FICA tax obligation.  

Each person and each flipped property comes with their own unique circumstances – so it’s important to consult a CPA or other tax professional to get a full understanding of the tax obligations that your particular flip will carry.

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