Record-Keeping and Tax Tips for House Flipping Activities

House flipping

The practice of purchasing properties in order resell them for a profit—can be a lucrative side hustle or full-time business. However, accurate bookkeeping and tax compliance are critical for sustainably growing your flipping business while staying in good standing with the IRS. Read on for key record keeping and tax tips for house flipping activities and principles, tax deductions to maximize, common filing mistakes to avoid, and more expert tips for keeping the right financial paper trail.

Lay the Groundwork for Bookkeeping

Like any small business, establishing organized systems for tracking income and expenses is foundational. Start by opening dedicated business checking and credit card accounts under your ownership or your LLC's name. This keeps personal and business finances separate. Also build paper and/or digital filing methods for important documents tied to each flip, including purchase and sale paperwork, invoices, mortgage information, receipts for supplies or renovations, insurance certificates, inspection reports, and communications with buyers and service providers. Laying this groundwork makes transaction entry and year-end reporting much smoother.

Deduct All Allowable Expenses

One major advantage of generating income from house flipping is having many deductible expenses to offset your tax liability, which ultimately boosts your profit margin. Make sure to capture deductible costs like:

• Purchase price, closing fees when buying, real estate commissions when selling

• Loan fees and interest if you took out financing

• Property inspection, escrow, and title insurance fees

• Cost of repairs, restoration, or major renovations

• Property taxes while holding the house

• Home appraisal fees

• Legal, bookkeeping, or real estate agent fees

• Equipment or supply costs (up to $2,500 per item)

• Travel to/from flip houses

• Home office deductions for your base of operations

You must maintain thorough documentation like receipts, invoices, or bank/credit card statements to prove these expenses later. Organization is key!

Track Time Spent on Each Flip

Some house flippers only invest in a few projects per year. However, full-time flippers juggle multiple properties simultaneously in various stages of the process. Meticulously tracking time investments is crucial to measure true profitability and identify areas for efficiency gains. Use a spreadsheet, notebook, app, or online system to capture major tasks related to each flip, such as:

• Researching target neighborhoods or listings

• Visiting potential properties

• Making offers, negotiating purchases

• Working with real estate agents and lenders

• Overseeing contractors and renovation work

• Staging houses for showings

• Conducting open houses

• Handling buyer inquiries and showings

• Closing sales

Later, you can use this time data to calculate hourly rates to guide pricing and staffing decisions.

Watch for Common Filing Mistakes

Despite best intentions with record keeping, house flippers often make tax mistakes filing their first returns. It's important to be aware of easy-to-avoid pitfalls:

• Claiming the standard deduction when itemizing all flipping expenses would be more beneficial

• Forgetting to claim eligible business credits like the Rehabilitation Tax Credit

• Indicating flipping income as capital gains rather than ordinary business income

• Not filing quarterly estimated payments toward your annual tax liability

• Incorrectly reporting flipping funds received from lenders as income before the loan is fully repaid

• Failing to note the business use percentage of vehicles also used personally for deduction calculations

Work closely with a tax professional to ensure you maximize savings opportunities within the guidelines.

Set Aside Funds to Cover Taxes

House flipping tends to be a cash intensive endeavor between purchase costs, renovations, and carrying costs before the profitable sale. However, it's critical to think ahead and set aside a percentage of funding specifically earmarked for quarterly estimated tax payments and annual income tax filing obligations. The last thing you want is to be caught cash short when tax bills come due, forcing you to dip into your operating capital reserved for additional flips. Get in the habit of calculating payments each time you close on a property sale.

Conclusion

With accurate record keeping and financial management, house flippers can build truly scalable, sustainable businesses. Follow these bookkeeping best practices and tax filing tips to ensure your flipping activities remain profitable while keeping the IRS satisfied. Get your accounting fundamentals set from the start, and you’ll setup your burgeoning venture for long-term success.

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