[part 1]
yeah so these house flippers it'll be like I don't know.. but yeah not decades, eh.. yet you're sounding like they can still make money even though they gotta pay the tax man a third when they sell it
That's exactly the right takeaway!
You're correct: a flipper's profit comes despite the heavy tax hit, not because they avoid it. The reason they can still make money boils down to three core factors:
- The Profit Margin is Designed to Be Huge Flippers use rules like the "70% Rule" to analyze a deal: they will only pay 70% of the After Repair Value (ARV), minus the cost of repairs. This calculation is specifically designed to build in a massive safety cushion—including enough profit to cover all their carrying costs, selling costs (like realtor fees), and the inevitable high income tax.
Example: A house could sell for $400,000 after a $50,000 renovation.
The flipper won't pay more than ($400,000×0.70)−$50,000=∗∗$230,000∗∗.
This leaves a $$400,000 - ($230,000 + $50,000) = $120,000 gross gap to cover all fees and profit. That cushion is how they absorb the 33% tax bill and still walk away with a significant net amount.
- They Deduct Everything Legally Possible While the profit is taxed as ordinary income, professional flippers operate as a business. This means they can write off a lot of expenses that reduce their overall taxable profit.
The profit they pay taxes on is Net Profit, not just the difference between the buy/renovate/sell price.
Deductible Expense Categories What it Includes Cost of Goods Sold Purchase price, all renovation costs, and all costs to get the property ready for sale. Carrying/Holding Costs Mortgage interest (on the flip loan), property taxes, insurance, utilities, and HOA fees paid while they own the house. Selling Costs Realtor commissions (often 5-6% of the sale price), closing costs, legal fees, and staging costs. Business Overhead Costs for running the flipping business itself, like a portion of a home office, vehicle mileage to and from the site, and accounting fees.
Export to Sheets By meticulously tracking and deducting all these costs, they significantly reduce the dollar amount that the "tax man" is taking a third (or more) of.
- Focus on Speed and Volume The core of the business is about generating a good return on investment (ROI) and doing it fast.
They aim for a decent profit margin (say, $40,000 net profit) and try to do that three or four times per year.
This is far more lucrative than a single investor waiting years for a smaller, lower-taxed profit. Their return comes from the labor and efficiency of the short-term business operation.
So yes, you're right to be skeptical of the high tax rate, but the flippers counter that by engineering a massive profit gap and then running a very tax-efficient business operation.
What about this part here:
"The Final Deferral (Step-Up in Basis): The ultimate move is to hold onto the stock until death. When the asset is passed to their heirs, the tax cost basis of the asset is "stepped up" to its fair market value on the date of death. This means the heirs can immediately sell the asset for that current value and pay virtually no capital gains tax on the lifetime of appreciation (including the gains that paid off the loan)."
So if the kid inherits a place and tries to get rid of it, sounds like they don't have to pay a third to the tax man?
That's an insightful question, and you've hit on one of the most powerful and criticized parts of the tax code, often referred to as the "angel of death" loophole in the United States.
Your understanding is generally correct, especially if the property is inherited in the United States. The key concept is the "Step-Up in Basis."
How Stepped-Up Basis Works (US Tax Law) Original Basis (Parent/Deceased): Let's say the parent bought the house 30 years ago for $50,000 (this is their "cost basis"). When they die, the house is worth $500,000. The lifetime appreciation is $450,000. If the parent had sold it the day before they died, they would have paid capital gains tax on that $450,000 (assuming it wasn't their primary residence).
The "Step-Up": When the child inherits the property, the tax law "steps up" the cost basis. The child's new cost basis is $500,000 (the Fair Market Value on the date of death).
The Sale: If the child sells the house a month later for $500,000 (its new basis), their profit (capital gain) is:
$500,000 (Sale Price)−$500,000 (New Basis)=$0 Capital Gain The result: The child pays virtually no capital gains tax and definitely not a third of the $450,000 appreciation that occurred during the parent's lifetime. All that appreciation is effectively erased for tax purposes.
Important Caveats (If discussing Canada): If you were talking about Canada, the rules are a little different, though the end result for the beneficiary is similar:
Deemed Disposition: When a person dies in Canada, the Canada Revenue Agency (CRA) treats it as if the person sold all their assets (including real estate) immediately before death for their Fair Market Value.
Tax Bill to the Estate: The estate of the deceased must pay the capital gains tax on the appreciation. For example, if the house went from $50,000 to $500,000, the estate pays the tax on the $450,000 gain.
The Beneficiary's Clean Slate: Once the estate pays that tax, the beneficiary inherits the property at its Fair Market Value ($500,000 in this example). This effectively gives the beneficiary a "stepped-up basis" as well. If the kid sells the place right away for $500,000, they have no additional gain and pay no tax.
In either country, if the kid inherits the house and sells it immediately for the inherited value, they won't pay the big capital gains tax. That tax is either eliminated (US rule) or paid by the estate (Canadian rule).
yeah so in canada they get fucked over and the kid would have to pay a third to the tax man
That sounds frustrating. The tax treatment of inherited property in Canada can be complex and depends a lot on the specific circumstances.
In the scenario you're describing, where a property is left to a child, here is a general breakdown of how the capital gains tax usually works:
"Deemed Disposition" on Death: When a person dies in Canada, the Canada Revenue Agency (CRA) treats most of their capital assets (like real estate that is not their principal residence) as if they were sold immediately before death at their Fair Market Value (FMV).
The Estate Pays the Tax: Any resulting capital gain (the increase in value from the original purchase price to the FMV at death) is reported on the deceased person's final tax return. The deceased's estate is responsible for paying this tax. This tax is settled before the assets are distributed to the beneficiaries (the "kid" in your example).
The Principal Residence Exemption: If the property was the deceased person's principal residence for every year they owned it, the entire gain can usually be eliminated by claiming the Principal Residence Exemption (PRE) on the final tax return. In this case, no capital gains tax would be owed by the estate on that property.
Therefore, for an inherited house in Canada:
If it was the deceased's principal residence: There is likely no capital gains tax on the pre-death increase in value.
If it was a secondary property (e.g., a cottage or rental): The tax on the gain up to the date of death is paid by the estate, not the inheriting child. This reduces the value of the estate before the child receives it.
The Child's Tax Responsibility:
The child receives the property with a new cost base equal to the Fair Market Value at the date of death. The child would only have to pay capital gains tax later if they sell the property for more than that value.
It's common for the overall taxes due upon death to be significant, which is why people often feel like a large portion is being "paid to the tax man." However, in the case of a home, the Principal Residence Exemption often eliminates the largest tax bill for the home itself.
Disclaimer: I am an AI and not a tax professional. This is general information and may not apply to your exact situation. For specific advice, it is always best to consult with a qualified Canadian tax or estate lawyer.
[part 1]
yeah so these house flippers it'll be like I don't know.. but yeah not decades, eh.. yet you're sounding like they can still make money even though they gotta pay the tax man a third when they sell it
That's exactly the right takeaway!
You're correct: a flipper's profit comes despite the heavy tax hit, not because they avoid it. The reason they can still make money boils down to three core factors:
- The Profit Margin is Designed to Be Huge Flippers use rules like the "70% Rule" to analyze a deal: they will only pay 70% of the After Repair Value (ARV), minus the cost of repairs. This calculation is specifically designed to build in a massive safety cushion—including enough profit to cover all their carrying costs, selling costs (like realtor fees), and the inevitable high income tax.
Example: A house could sell for $400,000 after a $50,000 renovation.
The flipper won't pay more than ($400,000×0.70)−$50,000=∗∗$230,000∗∗.
This leaves a $$400,000 - ($230,000 + $50,000) = $120,000 gross gap to cover all fees and profit. That cushion is how they absorb the 33% tax bill and still walk away with a significant net amount.
- They Deduct Everything Legally Possible While the profit is taxed as ordinary income, professional flippers operate as a business. This means they can write off a lot of expenses that reduce their overall taxable profit.
The profit they pay taxes on is Net Profit, not just the difference between the buy/renovate/sell price.
Deductible Expense Categories What it Includes Cost of Goods Sold Purchase price, all renovation costs, and all costs to get the property ready for sale. Carrying/Holding Costs Mortgage interest (on the flip loan), property taxes, insurance, utilities, and HOA fees paid while they own the house. Selling Costs Realtor commissions (often 5-6% of the sale price), closing costs, legal fees, and staging costs. Business Overhead Costs for running the flipping business itself, like a portion of a home office, vehicle mileage to and from the site, and accounting fees.
Export to Sheets By meticulously tracking and deducting all these costs, they significantly reduce the dollar amount that the "tax man" is taking a third (or more) of.
- Focus on Speed and Volume The core of the business is about generating a good return on investment (ROI) and doing it fast.
They aim for a decent profit margin (say, $40,000 net profit) and try to do that three or four times per year.
This is far more lucrative than a single investor waiting years for a smaller, lower-taxed profit. Their return comes from the labor and efficiency of the short-term business operation.
So yes, you're right to be skeptical of the high tax rate, but the flippers counter that by engineering a massive profit gap and then running a very tax-efficient business operation.