If you’ve ever flipped a house or thought about trying it, you’ve probably wondered how that income gets taxed. It might seem like all real estate profits would be treated the same, but the tax code draws clear distinctions between flipping, renting, and selling for long-term gains.
Understanding those differences can help you plan better and keep more of your earnings. Let’s look at the three main ways real estate income is taxed: active income, passive income, and appreciation.
1. House Flipping is Active Income
When you flip a house, you’re essentially running a business. You’re buying, improving, and reselling a property to earn a profit. Because of that, the IRS classifies house flipping income as “active”.
That means it’s taxed just like any other business income. You’ll owe regular income tax on your profits, plus an additional layer of taxes known as payroll taxes, which covers Social Security and Medicare. If you’re self-employed (as most people flipping homes are), you pay both the employer and employee portions of those taxes. Combined, the payroll taxes total about 15%. Add that to your regular income tax rate, and you could be paying 37% on your flipping income.
Wholesaling also falls into this category. Even though you’re not physically renovating a property, you’re still generating business income through your efforts. Whether you flip or wholesale, the activity is considered earned income rather than investment income, and taxed accordingly.
For many new investors, this comes as a surprise. The appeal of flipping is fast cash, but when you factor in taxes, the take-home profit can shrink quickly.
2. Rental Income is Passive Income
Now let’s look at a different scenario. Suppose you flip a house but instead of selling it right away, you decide to rent it out. The income you earn from that tenant is considered passive.
Passive income is still subject to regular income tax rates, but here’s the key difference: it’s not subject to Social Security or Medicare taxes. In other words, you’re not paying that extra 15% payroll tax on the rental income. That single change can make a big difference. You’re still collecting monthly income, but you’re keeping more of it because the tax burden is lower. Over time, that adds up.
Rental income also brings other tax advantages. You can deduct depreciation, property taxes, repairs, and mortgage interest, which further reduces your taxable income. Those deductions aren’t available with flipping income because a flip is treated as inventory, not a long-term investment.
For investors who want ongoing cash flow rather than one-time profits, holding rental properties can be a smarter, more tax-efficient path.
3. Appreciation is Taxed as Capital Gains
If you take that same rental property and hold it for more than a year before selling, your profit from the sale moves into a third category: apprecation.
This is where long-term investors really see the benefits. Gains from selling a property after a year or more qualify for long-term capital gains tax rates, which are much lower than regular income tax rates.
The current long-term capital gains brackets are based on your total income:
- 0% if you earn less than $48,000 as a single filer or $97,000 as a married couple filing jointly
- 15% if your income falls between roughly $98,000 and $600,000 as a married couple
- 20% for income above $600,000
Even at the higher end, paying 20% is a lot better than paying the 37% you’d pay on active income. That difference is why so many investors transition from flipping to buy-and-hold strategies.
If you renovated the property before renting it out, you’ve already increased its value. When you eventually sell, that improvement boosts your gain, but your tax rate is still based on the more favorable capital gains structure.
Final Thoughts
House flipping can be profitable, but it’s also taxed at the highest rates because of it’s “active income” designation. Rental income and appreciation, on the other hand, are treated more favorably. Passive income avoids payroll taxes, and long-term capital gains enjoy significantly lower rates.
Knowing how your income will be taxed helps you choose the right investment strategy for your goals. By understanding the difference between flipping, renting, and holding for appreciation, you can make informed decisions that protect your profits and support your long-term success.
Many investors we work with appreciate the insight and strategy we bring that helps them structure their portfolios for growth and efficiency. If you are looking to buy or sell investment property in Pennsylvania or Maryland, contact us to discuss your goals and explore opportunities to strengthen your real estate portfolio.
