If an individual flips alot of homes for profit in California, are there any bad consequences with IRS?

Answer 1

Well, maybe, depending on whether you are a licensed realtor and how much time you spend on the activity. See IRS pub 925 for the rules to see if you qualify as a real estate professional. See "Material Participation" section. The link is below.

You might be considered self-employed which would subject your profit to income tax AND selfemployment tax. Also, while you hold them the houses may be considered inventory which means that LT capital gain treatment does not apply.

If this is your business, you may want to consult a QUALIFIED tax professional (CPA, EA or tax att'y) now so you don't get ambushed next April.

Good luck!

Hank Roitman, EA
Sacamento, CA

Answer 2

The answer to this question will hinge on whether the activity is deemed by IRS to be merely investment activity or a business activity. Such a determination will take into consideration how the activity is organized along with the way you present yourself to the general public and the frequency or regularity with which the properties are bought and sold. In either case, there will be both upsides and downsides, and this is especially true in a volatile market where there are both losses and profits being made respectively on the individual properties. There have been cases when the IRS determined that both the nature of the activity and choice of organizational structure weighed more heavily on the side of being classified as an activity engaged in for the primary purpose of the generation of ordinary income as opposed to capital gain income---in other words, when the properties were deemed held as inventory for sale to the general public instead of held for purposes of investment. It is a fundamental mistake to look only at one aspect of the activity to conclude how it will be classified.

My best advice to you is, hire a seasoned accountant or tax preparer. You're making profits (it would appear), so, there's no excuse for not consulting an expert in such matters.

Answer 3

The only problem that you will have is if you don't report the income. Otherwise, the IRS couldn't care less.

Answer 4

Keep careful track of revenue and expenses. I imagine its the kind of business where you could lose track of expenses, especially if some of the labor and material for repairs is paid in cash.

Answer 5

There are no bad consequences but you must pay a capital gains tax. i believe it is 28% if you hold the property less than one year 15% if over one year. Look this up and keep records and go to an accountant to file your taxes. It is a little different if he has a business or a partnership.

Answer 6

Only if you don't accurately report your income and pay your taxes.