Is an LLC for Flipping Houses Considered a Dealer for Taxes?

Flipping houses can be profitable, but it comes with tax implications that investors must understand. A key concern is whether an LLC engaged in house flipping is classified as a dealer for tax purposes, affecting how income is taxed and what deductions apply.

Tax treatment depends on factors like frequency of sales, intent, and holding period. This classification impacts how profits are reported and which expenses can be deducted.

Tax Classification

The IRS determines whether an LLC involved in house flipping qualifies as a dealer based on its operations. A dealer buys and sells real estate as inventory, meaning properties are acquired primarily for resale rather than long-term investment. This classification affects tax treatment, including whether gains qualify for capital gains rates and how self-employment taxes apply.

One key factor is the frequency of sales. An LLC flipping multiple properties annually is more likely to be classified as a dealer. Intent also matters—if properties are bought, renovated, and sold quickly, the business is focused on resale rather than appreciation or rental income. Holding period is another consideration, as properties sold within a year of purchase are more likely to be treated as inventory rather than capital assets.

Being classified as a dealer has significant tax consequences. Unlike real estate investors who may qualify for long-term capital gains tax rates (0% to 20% in 2024, depending on income), dealers must report profits as ordinary income, which can be taxed as high as 37%. Dealer income is also subject to a 15.3% self-employment tax in 2024, increasing the overall tax burden compared to investors holding properties for longer periods.

Reporting House Flip Income

When an LLC flips a house, the profit is treated as ordinary business income. A single-member LLC reports income on Schedule C of the owner’s personal tax return, while partnerships and corporations use the appropriate business tax return. Because house flipping is an active trade or business, revenue is subject to both federal income tax and self-employment tax.

Accurate record-keeping is essential. The IRS requires detailed documentation of all transactions, including purchase price, renovation costs, and selling expenses. Taxable profit is calculated by subtracting these costs from the sale price.

Income recognition depends on the accounting method used. Under the accrual method, revenue is recorded when the sale contract is signed, even if payment is received later. Under the cash method, income is recognized when funds are received. Most small LLCs use the cash method, but those with higher gross receipts may be required to use the accrual method.

Expense Deductions

Maximizing deductions helps reduce taxable income. Since house flipping is an active business, a wide range of expenses can be deducted if they meet IRS guidelines. Direct costs such as materials, labor, and contractor fees must generally be capitalized as part of the property’s cost basis rather than deducted immediately. These costs offset taxable income when the property sells.

Operational expenses related to running the business can also be deducted. Advertising costs, including online listings, photography, and staging, are fully deductible in the year incurred. Business-related travel, such as mileage to job sites or meetings with contractors, can be deducted at the IRS standard mileage rate, which is 67 cents per mile for 2024. Legal and professional fees, such as attorney costs for contract reviews and CPA fees for tax preparation, are also deductible.

Financing costs are another deductible category. Interest on loans used to purchase and renovate properties is deductible if the loan is directly tied to the business. Points paid to secure financing may need to be amortized over the loan’s life rather than deducted all at once. If an LLC incurs penalties for early loan repayment, those fees are generally deductible as well.