Flip This House on A&E, Flip That House on TLC, Flipping Out on Bravo. This list could go on, but you get the picture: TV shows about flipping houses are a dime a dozen.
House flipping is the practice of buying an undervalued home with the sole intent to resell it for a substantial profit. Shows about flipping houses send viewers the message that they can easily renovate a property and resell it for a huge profit… and all before the first mortgage payment is due! If that isn’t enticing enough, they make it seem like they could make more money flipping one property than they’ve made in the past year.
These shows fall into the category of “reality” TV; the reality is that it’s not as easy as it looks. They often fail to mention how hard it can be to bounce back and make a profit when all of the things that can (and frequently do) go wrong, and you’re trapped with a house you can’t sell. This includes anything from poor budgeting to a timing issue to a spike in nearby crime.
Facts that prove house flipping isn’t as easy as it looks on TV:
1. There are tons of others who dream about flipping houses and taking home huge paychecks. This competition means that obvious deals on undervalued homes are gone almost as fast as they’re available, and finding the right property is very time consuming.
2. You’ll need access to a significant amount of cash for down payments, repairs, and updates.
3. Every day you own the house equals additional costs in interest (if you took out a mortgage), utilities, taxes, and insurance.
4. The IRS might not make it worth your while.
If you buy a house, renovate, and resell it while you are working another full-time job, the purchase is considered an investment and the proceeds are taxed as short-term capital gains (if you own it for less than a year) or long-term capital gains (if you own it more than a year). Short-term capital gains are taxed at the same rate as your annual income, and long-term capital gains are taxed at 15%. However, if you’re flipping houses year-round and the income pays your bills, it’s considered a business. This means the profits will be taxed as ordinary income regardless how long you own the property, and you’ll have to pay a self-employment tax of 15.3%. PLUS, you won’t be able to utilize the IRS section 1031 like-kind exchanges, which help with taxes when you have a property that sells for substantially more than you paid for it. Only investment properties qualify for this type of tax break, and while the code doesn’t specify a time frame, the rule of thumb is that you need to hold it for at least a year.
With that said, flipping houses can be profitable for the right people with the right resources. If you choose to try your hand at flipping property, you should learn everything you can about the industry. Don’t consider making a career out of it until you’ve made double what you make a year in your current job. Also, it is possible (but undoubtedly exhausting) to moonlight as a house flipper.