ATTOM’s Year-End 2023 U.S. Foreclosure Market Report shows that foreclosure activity increased last year from 2022 levels, but is this a cause for concern for investors? 

The ATTOM report shows that foreclosure filings, which include default notices, auctions, and repossessions, stood at 357,062, up 10% from 2022 and 136% from 2021. These figures look much less alarming, however, when set in the context of pre-pandemic foreclosure levels. Foreclosure activity in 2023 was still 28% lower than it had been in 2019 and down a massive 88% from its peak in financial crisis-ravaged 2010. 

At its 2010 worst, U.S. foreclosures represented 2.23% of all U.S. housing units. At the end of 2023, this percentage stood at a mere 0.26%, a slight increase from 0.23% in 2022. 

ATTOM CEO Rob Barber commented in a press release that the 2023 rise in foreclosure activity should be viewed as ‘‘a market correction rather than a cause for alarm. It signals a return to more traditional patterns after years of volatility.”

It’s worth remembering that there was a foreclosure moratorium in place on federally-backed mortgage loans between March 2020 and July 31, 2021. This explains why foreclosure activity hit an all-time low of 0.11% of housing units in 2021. Inevitably, once the moratorium ended, foreclosure filings began climbing up. 

What Do the Numbers Mean?

Fortunately, what we’re not seeing is a nationwide wave of foreclosure activity that could signal systemic problems with the housing market and wider economy. Barber is confident that ‘‘while foreclosure activity may fluctuate, it’s unlikely to approach the highs seen in the last decade. Instead, we foresee a market that is more reflective of broader economic trends, with foreclosure filings becoming a more predictable aspect of the housing landscape.’’

Real estate investors on the ground appear to support the view that the rise in foreclosure filings at the current level isn’t worrisome. Yancy Forsythe, owner at Missouri Valley Homes, told BiggerPockets that the rise in foreclosure filings should be interpreted as ‘‘part of a market correction rather than a worrying trend.’’ In addition, while Forsythe is seeing ‘‘a similar trend of rising foreclosures in the Missouri real estate market,’’ it isn’t ‘‘alarming.’’

Still, a rise in foreclosures means that more people are unable to pay their mortgages. Investors should familiarize themselves with regional foreclosure trends. It’s on the regional level that the disparities in housing markets are beginning to show themselves. 

According to the ATTOM data, five states in 2023 saw foreclosure levels actually increase from pre-pandemic levels:

• Indiana (+73%)
• Idaho (+70%)
• Michigan (+15%)
• Nevada (+10%)
• Minnesota (+9%) 

However, these weren’t the states with the greatest overall foreclosure numbers. Those were California (29,180 foreclosure starts), Texas (28,533), and Florida (27,427). To put these numbers into context, these are all densely populated states (California has a population of 39 million), whereas Indiana is relatively sparsely populated (population of 6.8 million), and the rise in foreclosure activity here is dramatic. 

Investors need to take note of these numbers because a sharp rise in foreclosure activity means that, on the one hand, local homeowners are really struggling with affordability, and, on the other, they are having a hard time selling. Rachel Blakeman, director of Purdue Fort Wayne’s Community Research Institute, told the Fort Wayne Media Collaborative that in a thriving housing market like Northeast Indiana, ‘‘if you can sense that you’re starting to get behind on your mortgage and you need to get out of the house, you can probably sell the house relatively quickly. Depending on how long you’ve owned the house, you’re probably not underwater.’’

Redfin data for November 2023 shows that while home prices were continuing to grow in Indiana (2.2% year over year), the number of home sales declined by 9.34%. A stagnant housing market, combined with ongoing unaffordability, is bad news for local populations, and it’s not great news for investors. 

The Bottom Line

While foreclosure investing in hot markets can be lucrative, it is much riskier in areas where selling or renting out a property may present challenges. That said, high foreclosure numbers in large states are not to be taken as a sign of an unhealthy housing market. 

Take Florida, for instance. Yes, it is the state with the highest number of foreclosures, according to the ATTOM report. Yet even a rookie investor will know that Florida continues to be an attractive location for investing in real estate. 

Florida is experiencing a population boom, with nine of its largest metros expected to grow 10% or more in the next decade. Demand for Florida homes will continue to outstrip supply. What this means is that even homeowners who find themselves in a foreclosure or pre-foreclosure situation will have no trouble finding a buyer. If someone can’t afford a home in Florida, someone else will buy it.

As the Indiana example demonstrates, there will be housing markets that display different patterns within the same state. Investors should take note of this and only invest in an area with high foreclosures if it is also experiencing a population influx and has a healthy labor market. Before investing in an area, always investigate it for signs of a possible housing market decline: high foreclosure rates, high local unemployment, and high numbers of underwater mortgages.

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Jay McCanless, Wedbush housing analyst, joins ‘Squawk on the Street’ to discuss how the ‘purchase-centric’ housing market will play out, whether changing yields move the demand for mortgages, and more.

Flipping houses can be extraordinarily profitable, which is one of the reasons why it’s a popular real estate investment strategy.

You go in with a competitive bid, invest some funds making repairs and sprucing up the place, and then sell. It’s rewarding, and when done well, it can be extremely lucrative. 

And while many people know about the potential expenses and risks that come with the actual acquisition, remodeling, and sale of house flipping, some investors are surprised to learn about the taxes involved.

In this guide, we’ll discuss everything you need to know about house flipping taxes, including what to expect, when you’ll pay, and the types of tax you can expect to incur. 

Understanding Tax Implications of House Flipping

Real estate is a capital asset, so profits from home purchases are taxed under capital gains rules when investors purchase a property and do not live in it as their primary residence. 

There are two types of capital gains tax: short term and long term. 

Short-term capital gains taxes are taxed the same as your income tax rate and are for profits on real estate that are held for under a year.

Long-term capital gains taxes are for assets held over a year and are charged at more favorable rates (which may range from 0% to 20%, depending on the bracket your profit falls into).

If charged a capital gains tax, buyers will typically be experiencing short-term capital gains tax, since flippers are often motivated to flip and sell quickly to maximize profit. 

That said, individuals who purchase and remodel real estate for profit on a regular basis—aka house flippers—are classified as “dealers” rather than “investors” by the IRS. Investors typically hold properties for longer, like purchasing a property and renting it out for income for several years. 

Because flippers are often considered “dealers” and not “investors,” they often do not pay capital gains taxes. The properties are considered to be inventory. 

As a result, profits on the sale of these properties are treated as ordinary income and will be subjected to the self-employment tax, which is 15.3% in 2024.

How to know if I’m a dealer or an investor?  

The IRS looks at the following criteria to determine if you’re classified as a dealer or an investor:

• The frequency and amount of real estate purchases and sales, with dealers having more purchases and sales regularly 
• Whether the purchase was ever listed as your primary place of residence
• Whether the property was purchased for the purpose of resale
• The amount of advertising that went into the property’s sale
• The extent of improvements made to the property
• The general activities of the individual flipping and selling the property

If you’re unsure what category you may fit into, you can talk to a licensed certified public accountant (CPA) with real estate experience. 

Pre-Flip Planning and Tax Strategies

Setting up business structures like an LLC or an S-corp can provide different tax benefits for house flippers.

Starting an LLC, for example, can offer multiple tax options while offering a layer of personal liability protection. They also allow for pass-through taxation, which means that the income is declared on your personal return to avoid the “double taxation” that corporations face. 

S-corps are another popular option. There’s a lot more paperwork involved, but they allow you to have “business income,” and you can choose to pay yourself as a W-9 contractor or as a W-2 employee with a salary. If used to regularly flip real estate, profits and losses aren’t treated as capital gains or losses, but as ordinary income. 

If deciding between an LLC vs an S-corp structure, some house flippers choose to set up an LLC that elects to be taxed as an S-corp, which can give you the best of both worlds. 

When in doubt, talk to a trusted advisor or CPA to help you determine what structure is best for you—ideally before you get started. 

During the Flip—Tax Deductions and Credits

Good news for house flippers: You don’t just subtract the purchase price from the sale price and call it a day for taxable income. You can also leverage both tax credits and deductions on house flips that can reduce your overall tax burden. 

Capitalized costs and common deductions for house flippers  

Common deductions and costs associated with running your business include:

• Expenses from professional services like lawyers, accountants, and consultants  
• Office expenses, including a lease and office furniture (or, alternatively, a home office deduction if working from home)
• Costs of software used to manage the business, including invoicing software, contract software, or accounting software

In some cases, the costs to renovate the property may be eligible to serve as business deductions. In many cases, you’ll need to leverage them as capitalized costs, which means that the cost is added to the original value of the property. 

These costs may include:

• Renovation costs, including materials and labor 
• Interest on loans taken to acquire the property
• Property taxes paid during the time of ownership
• Costs of obtaining permits and inspections
• Cost of utilities, like electricity and water, which are needed to perform work on the home

Keep careful track of every expense you incur, including receipts and purchase orders. 

Possible tax credits 

Some house flippers may be able to take advantage of tax credits, which is a dollar-for-dollar amount they can claim on their returns to lower the amount of taxes paid.

The most common tax credits flippers may experience are energy-efficient improvements. Examples include:

• Adding owned solar panels to a home
• Adding a heat pump to an air conditioning unit
• Upgrading to more energy-efficient appliances 

The Tax Events of a House Flip

The biggest tax events of a house flip are at the point of sale and the 1031 exchange.

Point of sale 

When you sell a property you’ve flipped, you’ll need to keep track of the profit and likely pay taxes on it. You only pay taxes on the income when the goods (aka the property) is sold. 

With a point of sale, you’ll subtract the original sales price from your resale price. That’s your gross profit, which you’ll declare on your income taxes if capital gains and losses don’t apply to your business. Business deductions will then be calculated and can reduce total tax owed. 

1031 exchange

Section 1031 of the Internal Revenue Code allows taxpayers in certain circumstances to defer recognition of capital gains—and its related liability on your federal income tax on the exchange of certain types of property in what’s appropriately called a 1031 exchange. 

A 1031 exchange, however, primarily applies to investors, not dealers, meaning the home was held primarily for sale as opposed to a long-term investment. 

If you do flip a house and leverage it as a rental property for an extended period of time, however, a 1031 exchange may be an option. 

Filing Taxes After a House Flip

When filing taxes after a house flip, there are a few things to keep in mind. 

First: You’ll report all income paid in the previous year on your annual return. You may need to file a business and personal return if you’ve incorporated. In the U.S., everyone needs to file a federal return, though many states also require you to pay state income taxes. 

When your annual return is filed, you will be expected to pay whatever is owed that hasn’t been paid throughout the year, with the infamous deadline falling on April 15 most years. 

You can file your personal return with Form 1040. Business return forms depend on your incorporation structure. 

You may also need to pay quarterly estimated payments throughout the year, which you’ll ideally pay through the year to pay self-employment tax. You’ll need to pay if you’re expected to owe $1,000 or more when your return is filed, or $500 or more if you’re a corporation. Quarterly taxes are typically owed on days around the 15th in the following months:

• April 
• June
• September
• January

You can pay quarterly estimated payments with Form 1040-ES. 

If you must pay capital gains taxes, you’ll typically need to pay that tax after you sell the asset, though it may only become fully due when you file your annual return. You may be required to pay quarterly estimated taxes. 

State-Specific Considerations

As discussed, federal taxes apply to all house flippers, but individual states may have their own tax laws, too. It’s important to keep these in mind. Each state may also have their own income requirements. 

Connecticut, for example, has a graduated individual tax with ranges from 3% to 6.99%, depending on your income bracket. They also have a 7.5% corporate income tax rate. 

States like Florida, New Hampshire, and Wyoming, meanwhile, do not charge personal income taxes. Some of these states do have corporate tax rates, however; Florida has a corporate tax rate of 5.5%. 

Leveraging Professional Help

Flipping houses can be complex, and it’s no surprise that taxes on flipping houses can be equally complex. For this reason, we strongly recommend working with an experienced CPA. 

A CPA can advise you about the benefits of different incorporation options and ensure that you’re paying all the taxes owed when you need to. And in many cases, CPAs can save you more than what you pay them by finding potential deductions while avoiding penalties. 

For best results, we strongly recommend opting for CPAs with real estate investment experience. 

Final Thoughts

Taking the time to ensure that you’re paying the right taxes when they’re owed is essential for house flippers. No one wants to find out they owe an extra $10,000 (plus penalties) when April rolls around. 

When you’re ready to start flipping houses, make sure you consider how you want your business to operate. That will determine what types of taxes you pay, how much, and when.

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Logan Mohtashami, HousingWire lead analyst, joins ‘The Exchange’ to discuss his 2024 housing outlook, the state of existing vs. new home sales, and more.

Do you want to get started in real estate investing but don’t have the funds to purchase an entire property? Fractional real estate investing may be the answer you’re looking for. Fractional investing offers lucrative opportunities to own part of a property rather than an entire one.

Fractional real estate ownership can be affordable for startup investors who want to enter the real estate market. But what is fractional investing? And is this the right investing model for you? 

This article is a comprehensive guide to fractional property investing. You’ll also learn the pros and cons of this investment strategy. You can then decide if it aligns with your financial goals.

What Is Fractional Real Estate Investing?

Fractional real estate investing involves several investors owning a portion of one or more properties. With fractional ownership, you can invest in real estate with lower capital. It’s a strategy to own a portion of one or more properties, giving you partial ownership rights and a share of financial returns.

7 Ways to Invest in Fractional Real Estate

Fractional real estate investing has gained in popularity. Online platforms and real estate marketplaces make it easier to find investment opportunities. You can diversify portfolios and manage investments more easily. Fractional investments also offer liquidity by enabling you to buy and sell fractional shares.

Here are seven fractional ownership models to consider.

1. Create a partnership

Creating a partnership is a common fractional investment model. This method involves individuals pooling resources and skills to purchase an investment property. Each partner contributes resources such as capital and expertise. They also share the risks, responsibilities, and rewards of the investment.

A real estate partnership typically involves creating a limited liability company (LLC) or a limited partnership (LP). Depending on the structure, partners can have an active or passive role. Also, the liabilities of limited partners depend on their involvement and investment. The general partner is responsible for the everyday operations of the investment property.

2. REITs

Investing in real estate investment trusts (REITs) is popular in fractional property investing. These investments give you real estate opportunities without high initial startup costs. REITs also allow you to develop a diversified portfolio across several property types. Buying shares in a REIT can be a good option if you want a passive investment.

How do REITs work? Fractional investors purchase shares or units of a REIT. A team of professionals manages the investment trust. You receive dividends from rental income, interest, or capital gains of the REIT properties. Publicly traded REITs offer liquidity because shares are bought or sold on stock exchanges.

3. Real estate syndication

Real estate syndication is a way to get started in fractional property investing. Syndication involves multiple investors pooling their resources to invest in property. You get the benefits of owning real estate without much capital or expertise in property management.

The syndicate sponsor is the general partner who oversees the investment strategy. Investors contribute capital and take on a passive role. 

The biggest benefits of syndication include:

4. Crowdfunding platforms

Real estate crowdfunding platforms make investing in property markets accessible to more investors. Crowdfunding platforms let you pool capital with other investors to buy shares in real estate projects. You can spread investments across multiple asset classes, property types, and regions.

Crowdfunding platforms are often an affordable entry point for smaller investors. They give you access to real estate investment opportunities. This way, you can build a portfolio and enjoy financial benefits like passive income and property appreciation.

Here are some popular crowdfunding platforms for fractional real estate investing:

• Ark7: This real estate platform lets you buy shares for as little as $20 and receive regular dividends from rental income. However, Ark7 fees can be higher than other platforms.
• Arrived: This real estate investing platform is popular for rental properties. Individual investors can start investing from $100. However, you must hold assets for at least five years, which may be too long for short-term investors.
• Concreit: This crowdfunding model lets you invest in real estate with a minimum investment of $1. It allows non-accredited investors and pays weekly dividends. However, it only pays 5.5% returns and only has one investment option.
• Fundrise: This real estate investment platform offers access to equity and debt investments. It has a small initial investment—as little as $10. It also invests your balance based on your financial goals. However, quarterly returns are not guaranteed.
• Lofty: This fractional ownership platform lets you access real estate markets for as little as $50. The platform offers tradable, blockchain-based tokens and pays out regular rental yields. But some investors don’t like dealing with crypto-based tokens.
• Yieldstreet: If you are looking for alternative investments, this crowdfunding company is a good choice. You can buy shares in various industries, including real estate, legal, and art. However, it’s more suited to accredited investors.

5. Vacation home rentals

Fractional ownership of a vacation property is a way to diversify your portfolio. Buying a portion of a vacation home gives you the benefits of ownership with access to a vacation home. You get access to the property for a specific number of weeks each year.

Fractional ownership of vacation properties shouldn’t be confused with timeshares. When investing, you own a portion of the property’s equity and become a co-owner. Unlike timeshare properties, you can sell your fractional ownership, gift it, or place it in a trust. Additionally, you can stay in your luxury resort vacation home or rent it out when you don’t use it.

6. Tokenized real estate

Real estate tokenization allows for fractionalized property ownership using blockchain technology. Several real estate platforms offer property tokens representing part of an investment property. Investors can purchase property tokens, taking on partial ownership for as much or as little as they can afford.

Benefits of tokenized real estate assets include:

• Low minimum requirements
• Better liquidity
• Access to global markets
• Investment opportunities for small-scale investors

That said, tokenized real estate investing can be more volatile and suffer from a lack of transparency.

7. Real estate exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) can make investing in fractional ownership properties easier. These funds are typically invested in REITs and traded like stocks and bonds. ETFs aim to replicate performances in a specific real estate index or sector.

Investing in ETFs has diversification benefits. For example, if you invest in several companies that own investment properties, this reduces risk. Additionally, dividend payouts tend to be high, and you benefit from increased liquidity. However, interest rates can affect the performance of ETFs.

Benefits of Fractional Real Estate Investing

Fractional real estate investing can give you easy entry into property markets. With minimal upfront costs, partial ownership of vacation properties can be within your reach.

Here are five benefits of fractional investing:

1. Lower barrier to entry: If you have limited funds, fractionalization lets you enjoy the benefits of property ownership. Purchasing fractional shares is more affordable than buying an entire rental property.

2. Diversified real estate portfolio: It is easier to diversify your investment portfolios by owning fractions of multiple properties. This gives you access to various markets and property types. Additionally, spreading investments across multiple properties reduces risk compared to investing in a single property.

3. Increased liquidity: Online investment platforms generally let you buy and sell fractional shares. This allows you easier access to cash and more flexibility than traditional property investments.

4. Professional management: Fractional ownership eliminates the day-to-day stress of managing rental properties. You don’t need to screen tenants, deal with maintenance issues, or lose rental income from vacancies.

5. Earn passive income: Fractional ownership in rental markets lets you earn regular income from rent payments. Additionally, you benefit from potential property appreciation when the asset is sold.

Risks & Considerations

Like any type of investment, fractional real estate investing has some risks. For example, you have less control over assets and investment strategies. And real estate markets can fluctuate.

Here are some risk considerations before starting in fractional property investing:

• Housing market risks: Investing in fractional ownership properties is subject to market risks. Factors affecting the performance of real estate investments include:
  • Fluctuations in property values
  • Market demand
  • Rental income
  • Vacancies
  • Economic conditions
• Lack of control: Fractional real estate ownership means you share control with several other investors. While being a passive investor is attractive to some, it’s not ideal if you want control over decisions. The more stakeholders, the less say you have in property management and investment strategies.
• Potential conflicts: Partial ownership of properties means you will probably deal with unknown co-owners. This situation can result in conflicts regarding financing, maintenance, and exit strategies.
• Lower returns: Returns may be lower than traditional real estate investing. Property management and crowdfunding companies can charge fees. Also, you must share returns among multiple investors.
• Limited exit strategies: Not all investing platforms offer liquidity options, and you may face heavy fees if you want to exit before a certain time. Also, selling fractional shares through secondary markets may have associated costs and complexities.

Who Benefits from Fractional Real Estate Investing?

Buying fractional property ownership may or may not be your best strategy, depending on your financial goals.

Typically, investing in fractional properties suits the following investors:

• Individual investors with limited capital: You can get started in real estate with limited financial resources.
• Beginner real estate investors: These investors can enter the real estate market with smaller investments and less experience in property management.
• Diversify your portfolio: Do you want a diversified portfolio? If so, you can spread investments across different properties and locations.
• Passive investors: Earn regular income from rental units without stressing about property ownership.
• Access to luxury properties: Get a foothold in the luxury property market and own part of high-value real estate or a luxury resort vacation home.

Final Thoughts

Fractional real estate investing can be an excellent investment strategy. This is especially true if you want to enter the property market with limited cash. Investing in a portion of an investment property rather than buying the entire property is more affordable. You can benefit from increased liquidity and professional management, and earn passive income through rental payments.

Before venturing into fractional real estate investment, it’s vital to consider your long-term financial goals and risk tolerance. Consider the pros and cons of fractional ownership of properties. That way, you can make informed decisions as you start your journey to build wealth.

Invest passively with syndications

Want to invest in real estate but don’t have the time? No matter your level of experience, real estate syndications provide an avenue to invest in real estate without tenants, toilets, or trash—and this comprehensive guide will teach you how to invest in these opportunities the right way.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.