ng it for almost a year. Some rehabbers work part time on a fixer and take six months to get the house ready. Add on two months to sell with a 60 day closing, and they’re up to ten months. To take advantage of the low 15% capital-gains tax rate, you must keep the investment property for at least a yeaUnderstand the tax consequences of flipping houses, rehabbing houses, and how to defer taxes with the 1031 Exchange before you get into real estate investing. Problems arise when real estate investors don't follow federal and state tax laws. This is why you need professional advice. Although I am not a tax advisor, here are some common mistakes beginning real estate investors make by not understanding tax liabilities:

Flipping Houses

The reason flipping houses is a mistake for some beginners is that they don't know the income tax consequences. One problem with flipping houses, or selling too many properties too quickly, the IRS could say that your real estate business is your trade, subject to ordinary income and self-employment taxes.

Self-employment tax, a social security and Medicare tax primarily for individuals who work for themselves, is similar to the social security and Medicare taxes withheld from the paycheck of most employees. The self-employment tax rate costs you 15.3% of your profits. (However, this may provide retirement benefits.)

Rehabbing Houses

Another common mistake that beginning investors make is selling a property after holding it for almost a year. Some rehabbers work part time on a fixer and take six months to get the house ready. Add on two months to sell with a 60 day closing, and they’re up to ten months. To take advantage of the low 15% capital-gains tax rate, you must keep the investment property for at least a year

a tax advisor, here are some common mistakes beginning real estate investors make by not understanding tax liabilities:

Flipping Houses

The reason flipping houses is a mistake for some beginners is that they don't know the income tax consequences. One problem with flipping houses, or selling too many properties too quickly, the IRS could say that your real estate business is your trade, subject to ordinary income and self-employment taxes.

Self-employment tax, a social security and Medicare tax primarily for individuals who work for themselves, is similar to the social security and Medicare taxes withheld from the paycheck of most employees. The self-employment tax rate costs you 15.3% of your profits. (However, this may provide retirement benefits.)

Rehabbing Houses

Another common mistake that beginning investors make is selling a property after holding it for almost a year. Some rehabbers work part time on a fixer and take six months to get the house ready. Add on two months to sell with a 60 day closing, and they’re up to ten months. To take advantage of the low 15% capital-gains tax rate, you must keep the investment property for at least a yea

selling too many properties too quickly, the IRS could say that your real estate business is your trade, subject to ordinary income and self-employment taxes.

Self-employment tax, a social security and Medicare tax primarily for individuals who work for themselves, is similar to the social security and Medicare taxes withheld from the paycheck of most employees. The self-employment tax rate costs you 15.3% of your profits. (However, this may provide retirement benefits.)

Rehabbing Houses

Another common mistake that beginning investors make is selling a property after holding it for almost a year. Some rehabbers work part time on a fixer and take six months to get the house ready. Add on two months to sell with a 60 day closing, and they’re up to ten months. To take advantage of the low 15% capital-gains tax rate, you must keep the investment property for at least a yea

rity and Medicare taxes withheld from the paycheck of most employees. The self-employment tax rate costs you 15.3% of your profits. (However, this may provide retirement benefits.)

Rehabbing Houses

Another common mistake that beginning investors make is selling a property after holding it for almost a year. Some rehabbers work part time on a fixer and take six months to get the house ready. Add on two months to sell with a 60 day closing, and they’re up to ten months. To take advantage of the low 15% capital-gains tax rate, you must keep the investment property for at least a yea

ng it for almost a year. Some rehabbers work part time on a fixer and take six months to get the house ready. Add on two months to sell with a 60 day closing, and they’re up to ten months. To take advantage of the low 15% capital-gains tax rate, you must keep the investment property for at least a year before selling. If you sell before a year, your tax rate, the usual capital gains rate of 35%, could eat up a significant amount of your profits.

If you're rehabbing houses, be patient. You could save thousands in taxes by holding your property just a few more weeks.

1031 Exchange

However, the Internal Revenue Code provides real estate investors away to defer capital gains taxes indefinitely. Section 1031 of the Internal Revenue Code provides a tax-free exchange. Also known as a "like-kind" exchange, this code allows you to sell a business or investment property and defer capital-gains taxes by immediately reinvesting the gains into a similar piece of property. The key, replacing a business or investment with similar property, means that no gain gets paid to the investor. Any profit taken out of escrow gets taxed. This means that beginning investors might take out a portion of the profit after they carefully explore their tax liabilities. In other words, talk to an accountant and find out what your tax would be according to your current usual income. Many business owners take advantage of this because they have many business deductions.

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