The real estate market in California is evolving at its own pace, making it difficult for investors to decide – is it better to flip properties for quick gains or hold them for long-term profits?

As we move into 2025, this dilemma is not just about market trends, it has been deeply tied to tax implications that can significantly impact the business bottom line. Perhaps, that’s the reason many agents and property owners prefer to seek the help of real estate CPAs for further guidance.

Understanding the Market Shift

Do you know – in 2024 the real estate market experienced a noticeable slowdown across many parts of California? This happened due to several factors – the rise in interest rates, limited inventory, and cautious buyers. As a result, today’s market is becoming more uncertain. Home prices are not rising faster and properties are taking longer time to sell. While this might make flipping risky, the right tax strategies could help optimize whichever path you choose.

Flipping in 2025

Making good money by flipping properties is still possible when you buy and sell them at the right time and at the right locations. Especially, if you choose Riverside County or specific LA neighborhoods undergoing revitalization.

Tax Considerations for Flippers:

• Short-Term Capital Gains Tax: Suppose, you sell a property within a year of buying it, your profit is taxed like regular income. In California, this could mean paying over 40% in combined state and federal taxes.
• Self-Employment Tax: If you’re actively flipping homes – buying, renovating, and selling regularly, the IRS might consider you a real estate dealer, not just an investor. That means, in addition to income tax, you also have to pay self-employment tax (like Social Security and Medicare), which increases your total tax bill.
• 1031 Exchange Limitations: An active flipper won’t qualify for a 1031 exchange. This means you have to pay taxes on your profit right away, instead of deferring those taxes by reinvesting the money into another property.

Feeling confused? Here’s a tip for you!

If you plan to flip, consider structuring your business under an S Corp or LLC to manage your tax liability more efficiently.

The Argument for Holding

The demand for quality rentals in urban hubs is increasing exponentially every year. Hence, holding properties and renting them out is a smart way to attain consistent income and long-term equity growth.

Tax Advantages of Holding:

• Long-Term Capital Gains: If you hold a property for more than a year, you usually have to pay a lower tax rate on your profit. The federal tax can go up to 20%, and you also have to owe California state tax—but it’s still less than the rate for short-term sales.
• Depreciation Deductions: Suppose you are a property owner and the value of your property is constantly increasing. Even in such cases, you can claim a tax deduction each year for the wear and tear on the building. This lowers your taxable income.
• Cost segregation: accelerates depreciation on rental or investment properties by reclassifying components into shorter recovery periods. This reduces taxable income early on, boosting cash flow. It’s especially valuable for long-term holders looking to maximize deductions and reinvest savings back into their portfolio.
• 1031 Exchanges: Unlike short-term investments, long-term holdings are eligible for 1031 exchanges. This lets you sell it and buy another investment property without paying taxes on the profit right away. Indeed, it’s a great approach to grow your real estate portfolio while delaying taxes.
• Passive Income Tax Benefits: Compared to regular income, rental income is often taxed at a lower rate. Besides, if you qualify under the Qualified Business Income (QBI) rules you can even deduct up to 20% of that income from your taxes. It is another best way to reduce your overall tax bill.

How a CPA Firm Can Help Real Estate Investors Flip or Hold with Confidence

Real estate tax laws are complex and constantly changing with time. Therefore, whether you decide to flip or hold properties in California, the guidance of an experienced CPA firm is crucial in today’s tax environment.

A seasoned CPA can help by:

• Analyzing your investment structure and helping you determine the most tax-efficient setup (LLC, S Corp, partnership, etc.)
• Forecasting tax liabilities based on your projected flip or hold strategy
• Maximizing deductions like depreciation, repairs, and property tax
• Ensuring compliance with California state tax laws, especially if you are an out-of-state investor
• Planning 1031 exchanges to delay taxes while expanding your portfolio
• Advising on exit strategies with long-term tax consequences in mind

Final Takeaway

Still in a dilemma about whether to flip or hold in 2025? Instead of navigating the complex tax landscape all alone, look for a professional real-estate tax accountant who can help you with making the right decision.

Consult with our experienced California CPA team today and make strategic decisions tailored to your unique investment journey.

Schedule a complementary consultation today.