Ask the Expert Q&A: The After-Tax Side of a Flip or Rental Exit, with Kasing Ng, CPA

By Steve Waller · October 23, 2026

Ask the Expert: a Q&A with Kasing Ng, CPA, a former Big 4 fund auditor who does the after-tax read on real estate deals.

My pro forma shows my exit number. Isn't that what I walk away with?

That's the pre-tax number. Running the flip exit and the rental hold off the same figures is the right move, but both of those are before tax, and the after-tax answer can flip which path actually keeps more.

Can't I just take the exit number off the pro forma and knock a flat tax rate off it?

That's the trap, and it's close enough to feel safe. The exit on a pro forma is a deal-level number, before tax, and the tax lands in two layers.

The first layer is the deal itself, and it runs on rules that don't care who you are. Part of the gain is just depreciation coming back. Some of that is unrecaptured Section 1250 taxed at up to 25 percent, and some can be ordinary recapture. There's the 3.8 percent surtax, and whether a 1031 is even on the table. Same deal, same answer, whoever owns it.

The second layer is you. Your bracket and your state move the number. So does your status on that specific deal, dealer or investor, and whether you materially participate. Suspended passive losses can swing it too. A flat "take off 20 percent" misses both layers at once. A real after-tax read nails the deal layer first, then puts your own assumptions right on the page, your bracket, your state, your status, so nothing is buried and you can drop in your own numbers. The deal half is the same for everyone. The personal half you pin to you.

I'm flipping. If I hold it a year, I pay long-term capital gains, right?

Usually no, and this is the one that surprises people most. If you're buying to fix and resell, the IRS treats you as a "dealer" and the house as inventory, not an investment. Holding a year doesn't help. The profit is ordinary income at your regular rate, you owe self-employment tax on top, around 15 percent, and you can't 1031 into the next deal. On a $100,000 profit, someone budgeting a 15 percent capital gains hit of about $15,000 can see the real number pass $35,000. A flip is never depreciated, so there's no recapture, it's just ordinary from the start.

So how do I know which one I am, a flipper or an investor? And can I be both?

It isn't a label you pick, and it isn't stamped on you as a person. The IRS looks at it one property at a time, based on what you actually did with that specific house. The core question is whether you held it mainly to sell, the way a store holds inventory, or to rent it and hold for the long run. What matters most is how often you buy and sell. After that the IRS looks at how long you held it, whether it was on the market for resale, how much of your living comes from these deals, and how much work you sank into turning it. No single factor settles it.

And yes, you can be both at the same time. You can be a dealer on the three houses you flipped this year and an investor on the fourplex you've rented for six years. Each property stands on its own. What you can't do is flip something, call it an investment on your return to grab the lower rate, and have nothing behind it. The IRS sees the sale on a 1099-S and reads your intent off your own return, and intent is judged by what you did, not what you meant to do. If you want the rental treatment, the conduct has to match: actually put it in service as a rental, keep the lease, take the depreciation, and let real time pass. An "I was going to rent it" with a for-sale sign in the yard two months after closing doesn't survive a second look.

If you're doing both on a regular basis, the cleanest setup is to keep them in separate entities, one that runs the flips and a separate one that holds the rentals. It doesn't change the law, the IRS still looks at each property on its own facts, but it keeps the two activities from bleeding into each other and leaves a clear record that the rental side was bought to hold, not to sell. It's a lot harder for anyone to argue your long-term rental was really dealer inventory when it sits in its own entity, with its own books, its own leases, and years on the clock. Worth setting up with your CPA before you're deep into both, not after.

I'm holding and renting instead. What's the catch at sale?

Depreciation recapture, which is exactly the piece most pro formas leave out. Every year you depreciate the building, you lower your tax basis by that amount. So your gain at sale isn't "sale price minus what I paid," it's sale price minus a basis that's been ground down, which means the depreciation that saved you taxes during the hold gets added back into your gain at exit.

What rate does that get taxed at?

Worse than you'd think, and it comes in pieces, not one rate. The depreciation you took on the building comes back first, as "unrecaptured Section 1250 gain," taxed at up to 25 percent, not the 15 or 20 percent long-term capital gains rate. If you ran a cost-segregation study, the shorter-life pieces are true recapture and come back as ordinary income at your full rate. Only the gain left after that, the actual appreciation, gets the capital gains rate. Then the 3.8 percent net investment income tax and state tax stack on top of all of it.

Quick numbers: depreciate about $145,000 over a five-year hold, and that $145,000 gets taxed at up to 25 percent while only the actual appreciation above it gets the capital gains rate, with NIIT and state on top of both. The pro forma never showed the 25 percent layer at all.

So which exit wins, flip or hold?

The flip hands you cash now, but it's all taxed at once, ordinary income plus SE tax, with no way to defer. The hold is the opposite. You can push the tax out. When you trade one rental for another, a 1031 exchange rolls the whole gain forward into the next property, the 25 percent depreciation layer included, instead of paying any of it now. A flip can't use a 1031 at all. The pre-tax spread won't tell you which keeps more. The after-tax number will.

One takeaway?

Know it before you're under contract, not after, the same discipline you use on the financing side. Run the after-tax exit on both paths while you still have the choice.

About the Author

Kasing Ng, CPA

Kasing Ng, CPA, is a former Big 4 fund auditor who does the after-tax read on real estate deals, the recapture and exit math pro formas leave out. credevsim.com

This post is general information, not tax advice for your situation. Talk to your own CPA before you act on it.

The full report is available at ACP's website, acp-lending.com. Investors can sign up to receive new reports by email at acp-lending.com/investor-brief.

Sources

• Kasing Ng, CPA

Market data is from public sources and is provided for information only. Nothing here is an offer of credit, a rate quote, or investment advice. Financing is subject to underwriting, lender approval, appraisal or valuation, title, insurance, property eligibility and program availability.

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