How are fix-and-flip profits taxed?

Flip profits are ordinary income, not capital gains. Taxed at your marginal rate plus self-employment tax if active flipping is your trade or business.

Fix-and-flip profits are taxed as ordinary income because the IRS treats flip property as inventory rather than investment held for productive use. The relevant tax rate is your marginal income tax rate (10-37% federal in 2024), plus state tax. If active flipping is your trade or business (multiple flips per year, full-time activity), you also pay self-employment tax (15.3% on the first ~$170K of net earnings, then 2.9% Medicare above). 1031 exchanges do NOT apply to flip property. You cannot defer flip gains by buying another flip. Strategies to reduce flip tax: (1) Form an S-corporation - splits income into salary (subject to SE tax) and distributions (not subject to SE tax). Can save 5-8% in self-employment tax on the distribution portion. (2) Convert flip strategy to BRRRR - if you hold the property as a rental for 12+ months before selling, the IRS may recharacterize as investment property eligible for 1031 exchange and capital gains rates. Documentation of intent matters. (3) Time sales across tax years - selling 6 flips in one year vs. spread across 2 years can affect bracket. (4) Section 199A deduction (Qualified Business Income) - flipping may qualify for the 20% pass-through deduction subject to limits. Consult a real estate CPA before committing to flip volume.