Do Flipping Profits Offset Stock Market Losses?

Comments(6)

• 
  BobSmith3217th September, 2003

  You wrote:
  "i would have to say cap. gains only if property had been titled in your name ...
  therefore flipping is just income..."
  
  My plan is to buy the property in my name, and then resell it. That's why it seems to me that it would be classified as short term capital gains...which ought to be eligible to offset losses in the stock market.
  
  
  Bob

• 
  DaveT18th September, 2003

  Quote:From various threads in this Forum, I've read that the profits from flipping houses are taxed as regular income.
  
  Question #1: Are flipping profits considered "income", or are they considered short term capital gains?
  BobSmith32,
  
  The answer to question 1 also answers question 2. Property flipping profits are active income, not passive or portfolio income. Therefore, flip profits are reported on Schedule C along with your "business" expenses. The property you flip is treated as inventory so no capital gains (neither long nor short) tax treatment applies here.
  
  Because your flip profits are reported Schedule C, you can not offset your short term losses on Schedule D.
  
  Consult your professional tax advisor for specific details.

• 
  BobSmith3218th September, 2003

  Dear Dave,
  
  Thanks for your response. It does illustrate my quandry, however.
  
  You (and another person) agree that short term flipping gains CANNOT offset short term capital losses...not matter what.
  
  Yet someone else wrote: "Both go on your schedule D. Then, at the bottom of the page, you add up all the losses and all the gains to come to a net number. If that number is a gain after the losses have been added in, then you still have some gain. If it is a loss, then you can take up to $3,000 on your taxes and roll the rest overto the next year. Then, the next year, if you have more gains, they woulkd be put n Schedule D, your rolled over amount would be put on schedule D, and you would continue the same way."
  
  A family friend (who's a tax attorney in Illinois) said that he thinks flipping profits count as capital gains if one is an "investor", but count as regular income if one is in the real estate business. If one is in the RE business, then houses represent inventory and are taxed like regular income.
  
  Sigh,
  
  
  Bob

• 
  DaveT19th September, 2003

  Quote:A family friend (who's a tax attorney in Illinois) said that he thinks flipping profits count as capital gains if one is an "investor", but count as regular income if one is in the real estate business. If one is in the RE business, then houses represent inventory and are taxed like regular income.BobSmith32,
  
  Refer your "family friend (who's a tax attorney in Illinois)", to Section 1402 of the tax code with special emphasis on the language that says that the profits from the activities of a real estate dealer are subject to self-employment income taxes.
  
  Then refer your friend to Section 453 and Section 1031which specifically exclude "property held primarily for sale to customers" from the tax treatments normally afforded to investment property.
  
  Next, refer your friend to Section 1221 which defines a capital asset. Have your friend note that "property held by the taxpayer primarily for sale to customers" (,i.e., flip property) is specifically excluded from the definition of a capital asset, and is instead called "inventory" or "stock in trade". I am sure that your friend will tell you that Schedule D is only used to report the gain and loss from the sale of capital assets -- not stock in trade.
  
  Your friend is absolutely right when he says that houses are inventory for someone in a real estate business. I am just trying to impress upon you that flipping property IS a real estate business.
  
  I maintain that your friend is completely mistaken if he thinks that flipping profits can be considered investment income when, by definition, flipping is the disposition of property held primarily for sale to customers.

• 
  newbalance57723rd October, 2003

  That was brilliant

• 
  InActive_Account29th October, 2003

  DaveT - I agree with every word. Bobsmith - You need to consult a professional tax advisor who understands the real estate business. Ask them if they understand dealer staus as a real estate business owner. If they look at you funny, find another advisor.