Profit on a flip is ARV minus five cost buckets this calculator tracks separately: purchase, rehab, holding, financing (points + interest), and selling costs. The 70% rule — pay no more than 70% of ARV minus rehab — exists to leave room for the last three, which is where flips that look profitable on paper actually lose money.
The cost stack, worked through the module's own math
Take a property with a $185,000 purchase price, $45,000 rehab budget, and $290,000 ARV, financed at 85% loan-to-purchase with 2 points and a 12% annual hard-money rate, held 5 months at $900/month carry, and sold at an 7% selling cost.
Why this deal is more fragile than the profit number suggests
Profit is $24,192 against total project cost of $265,808 — an 8.3% margin on the ARV. That margin is the whole cushion against everything that hasn't happened yet: an ARV that appraises soft, a rehab that runs over, or a hold that stretches past 5 months. Because selling costs are a percentage of the sale price rather than a fixed number, a lower actual sale price cuts profit twice — once directly, and once by also lowering the selling-cost deduction less than proportionally, since the fixed costs (purchase, rehab, most of holding and financing) don't move with the sale price at all. The break-even sale price on this deal — where profit is exactly zero after selling costs — works out to costs-before-sale ÷ (1 − 0.07) = $245,508 ÷ 0.93 ≈ $263,988. That's the number that matters when a buyer's agent starts talking about pricing the property to move.
The tax treatment is not the same as a hold
A flip and a BRRRR hold are taxed differently in a way that's easy to miss. A rental held for the long term gets 27.5-year depreciation under IRS rules and, if later sold, some of that depreciation is recaptured as unrecaptured Section 1250 gain — the IRS caps that portion "at a maximum 25% rate" per IRS Topic 409. A flip that's bought, rehabbed, and resold within months is generally never placed into rental service, so that depreciation-and-recapture mechanic typically doesn't apply at all — there's no 27.5-year schedule to have claimed against in the first place. Instead, the profit is usually taxed at ordinary income rates, since gains on assets held one year or less are treated as short-term rather than qualifying for the lower long-term capital gains rates that same IRS guidance describes for longer holds. That's a materially different tax picture from a BRRRR exit, and it's worth having your accountant confirm which bucket a specific deal falls into — including whether frequent flipping classifies you as a dealer, which changes the analysis further and is outside what this calculator or this article models.
Methodology
The worked example and sensitivity figures use this calculator's own module arithmetic exactly: loan amount, points, interest-over-hold, holding cost, selling costs, total project cost, profit, cash invested, ROI, the 70% rule ceiling, and break-even sale price. The short-term versus long-term capital gains distinction and the unrecaptured Section 1250 wording are drawn from IRS Topic No. 409; no state tax rate or dealer-status determination is assumed.
Sources
- IRS Topic No. 409 — Capital Gains and Losses (unrecaptured Section 1250 gain) — accessed 2026-09-07