Dear Tax Talk,
Can I offset capital gains from the sale of short-term investment real estate with capital losses from stocks? I have fixed up and flipped the property in less than one year.
-- Todd
Dear Todd,
It seems everyone is buying, renovating and flipping these days. Generally, the tax treatment of the sale is considered capital gain income. If the sale is considered capital gain income, you can offset capital gains with capital losses from any source, including stock market losses. The market losses can be either short- or long-term losses; there is no distinction. For example, if you have a $10,000 short-term gain from the flip and $2,000 in short-term and $3,000 in long-term stock losses, you'll end up paying tax on an overall $5,000 short-term gain.
If the flipping becomes a business, then the income from the sale of the properties would be ordinary income. This means you couldn't offset the income with the stock market losses beyond the standard $3,000 annual limitation on capital losses. Just what exactly constitutes a business of buying and flipping houses is unclear or what we refer to as a "gray area." One to two flips a year is probably not enough to be a business, but eight to 10 a year probably would be a business. If you rented for a period of time after renovating, then your gains would be capital by virtue of becoming property used in a trade or business. How much rental time is also unclear, but 12 months or more I would say to be sure it becomes a capital gain.
If your activity becomes a business, you'll also have to deal with self-employment taxes.
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