RISMEDIA, March 1 — (KRT) — Speculators who bought houses in 2005 and sold them in the same year may have reaped easy gains from skyrocketing California real estate values. But if they weren’t careful, they will feel pain at tax time.

The federal government allows investors who retain properties for longer than 12 months to pay a capital gains tax rate on their profit when they ultimately sell.

But the federal government taxes at a higher rate as regular income any profit realized by owning a property less than 12 months. “It is as if you had a second job and are paying income tax on it,” said Bruce Norris, a Riverside real estate investor and consultant.

Norris said Southern California’s booming real estate market lured many novice investors who followed a simple formula of signing an agreement to buy a new house in the first phase of a development and selling it at a tidy profit by the time it was constructed.

There are reasons why buyers “flip” properties rather than hold them long enough to get the tax advantage. They may not be able to make the monthly payments. Or they may worry about the possibility of a downturn in real estate prices. Or they may not have sought a tax accountant’s advice.

“It is good to make decisions about taxes prior to selling because you can’t undo it,” Norris said.

Pete Dolbee, a corporate tax partner at Haskell and White in Irvine, figured that a hypothetical married couple with taxable annual income of $100,000 would increase their federal and state income taxes from $24,314 to $61,876 by making a $100,000 profit from flipping.

The tax bite would be smaller if the couple sold their investment property at least a year after purchasing it because their profit would be taxed federally at the capital gains rate, which is as much as 20 percentage points less than the federal income tax rate.

Dolbee said the married couple earning $100,000 a year at their regular jobs and filing jointly would pay about $12,100 less in federal taxes by holding their investment property at least a year before selling it at a $100,000 profit. However, the state would continue to tax the investment gain as income.

Susie Leivas-Sturner, a Riverside tax accountant, said investors need to keep careful records of closing costs and the cost of home improvements that can be deducted from the sales price when calculating taxable gains. Only actual expenditures and not an investor’s own labor can be deducted, she said.

Sales gains on which an investor must pay taxes includes equity that may have been cashed out of a property through refinancing, she added.

Nick Manfredi, founder of the Inland Empire Investors Forum, said the Internal Revenue Service may closely scrutinize real estate investments because of the very large profits they generated in 2005.

Tax knowledge is important for making money in real estate, but it gets little attention, especially from part-time investors, Manfredi said. “The real truth is whenever I had tax events at the investors forum, hardly anybody showed up,” he said.