Capital Gains on a House Flip (Why It Is Usually Ordinary Income)

A flip is held for sale to customers, so the profit is ordinary income rather than capital gain

Section 1221(a)(1) excludes from capital assets property held primarily for sale to customers in the ordinary course of a trade or business. A house bought to renovate and resell at a profit is that kind of property for anyone who does it as a business, and the profit is taxed under the ordinary brackets of Rev. Proc. 2025-32: for 2026, joint filers reach 24% above $211,400, 32% above $403,550 and 37% above $768,700.

Courts decide dealer status on the facts. In Boree v. Commissioner the Eleventh Circuit listed seven factors: the purpose and duration of ownership, the effort spent selling, the number and continuity of sales, the extent of improving and advertising, the use of a business office, the control over sales agents, and the time devoted to sales. It called the frequency and substantiality of sales the most important, and no single factor decides.

Even someone who flips one house and is not a dealer usually sells within a year, so the gain is short-term and taxed at the same ordinary rates; short-term capital gains on real estate covers that case. Dealer status matters most when a flipper holds a house past a year and still cannot get the long-term rate.

Flipping as a business adds self-employment tax, which a rental sale never carries

Section 1402(a)(3) keeps gain on capital assets, and on most business property, out of self-employment income, but not gain on property held primarily for sale to customers. A flipper's profit is therefore subject to self-employment tax. IRS Topic 554 sets the rate at 12.4% for Social Security and 2.9% for Medicare on 92.35% of net earnings, with 0.9% Additional Medicare tax above $250,000 joint or $200,000 for single filers.

The Social Security part stops at the wage base, which Publication 15 puts at $184,500 for 2026; wages you earn elsewhere use up the same base. One offset: section 1411(c)(6) excludes from net investment income anything subject to self-employment tax, so the 3.8% surtax does not stack on top.

Worked example: a $100,000 flip profit against a long-term sale

Hypothetical, round figures. A married couple has $150,000 of other taxable income, none of it wages, and nets $100,000 on a flip they run as a business. Stacked from $150,000 to $250,000, the profit falls in the 22% bracket to $211,400 and the 24% bracket above it: $13,508 plus $9,264, so $22,772 of income tax.

Self-employment tax is 15.3% of $92,350 (92.35% of $100,000), about $14,130, less a small income tax benefit from deducting half of it, which this example ignores. Total about $36,900. The same $100,000 as long-term capital gain on an investment property held more than a year would be taxed at 15% in their bracket, $15,000, plus any net investment income tax. Run your own numbers with your CPA.

A flip cannot be exchanged, and the sale cannot be spread with an installment note

Section 1031(a)(2) says the exchange rules do not apply to real property held primarily for sale, and Publication 544 repeats that property held primarily for sale does not qualify. A flipper who routes sale proceeds through a qualified intermediary still owes the full tax.

Seller financing does not help either. Section 453(b)(2)(A) excludes dealer dispositions from installment sale treatment, and section 453(l) defines them to include real property held for sale to customers in the ordinary course of business, so the whole profit is taxed in the year of sale even if the buyer pays over years. Exchanging out of a fix-and-flip goes through the narrow cases that do qualify.

Holding the renovated house as a rental changes its character and opens the exchange

Purpose is tested when you sell, not only when you buy. Reg. section 1.1031(a)-1(b) treats real estate held by a non-dealer for future use or appreciation as held for investment. A flipper who renovates a house, rents it to a tenant and holds it for income builds the record for investment treatment: long-term gain after a year, section 1231 treatment as rental property, and a later 1031 exchange. The cost is depreciation recapture on the rental years and the risk that the IRS sees the rental as a pause in a sale business.

There is no statutory holding period for an exchange; how long to hold before a 1031 lays out what the cases and rulings look at. Rentals you keep can later be exchanged into larger property or a traditional DST interest, while houses you flip stay ordinary income every time.