Q: What are the tax differences between flipping houses vs short term rentals vs long-term rentals?

A: I am going to keep this brief – so know that reading this, you have more homework to do to fully understand it.

Flipping houses: From a tax perspective, this is more like a job and less like an investment.  And the house you are flipping is more like inventory than it is an investment asset.  Self-employment taxes are a substantial issue.  First, you are paying income taxes as ordinary income (as opposed to capital gains) and second, you are likely subject to payroll taxes.  Federal ordinary income tax rates are as high as 37%, self-employment taxes can exceed 15.3% and then the state you are flipping the house in likely wants a cut (as much as 13.3% in CA). That could be as much as 65% of your profits going to taxes. Not to mention, you can’t do a 1031 exchange. Pretty much none of the tax incentives for real estate are available to house flippers.

Short-term rentals: This is everyone’s darling on social media sites. In reality, it’s a tax mine field.  The good news is that you can use depreciation to offset your income from the property.  You also likely can take advantage of 1031 exchanges when you sell.  And you can qualify for long-term capital gains if you hold it for more than a year.  On the other hand, you do have to be careful of income tax rates and self-employment taxes.  Each situation is different, so get some professional advice here and document it.  You might benefit from forming a separate entity to provide the services related to the property (and thus absorb the self-employment tax issues) and keep each investment in a separate entity (and document your intent to hold the property long-term).

Long-term rentals: The most tax benefits accrue to long-term rental landlords.  You can benefit from depreciation, long-term capital gains, debt distributions, and likely no SE tax.  Plus, you can use 1031 to defer taxes when you move from one property to the next.  

My recommendation: don’t let the tail wag the dog – execute the business plan that nets you the most money over the time frame your money is invested.  But, be sure to calculate taxes in that equation.  Even for tax professionals, calculating all the different tax ramifications from these choices is hard – not a DIY subject until you really get the hang of it.

Parting message: Qualifying as a “Real Estate Professional” under that tax code can add enormous tax benefits to all these types of investments, but you have to both (1) qualify as a Real Estate Professional and (2) Actively Participate in the rental properties that generate the tax loss.  It’s beyond the scope of this question to go into detail but be sure to get rock solid advice before taking action on it.