A flip project will generally be taxed as ordinary income that is subject to the investor’s marginal tax rate. This is because a flip is classified as a “dealer” and is deemed to be in an active trade or business.
A long-term rental is defined as passive income and is subject to the passive activity rules. These rules allow you to offset passive income against passive losses. Any resulting net passive income will be taxed at ordinary income tax rates. In addition, upon the sale or disposition of a rental property, capital gains (or losses) will be generated that will be classified at a preferable long term capital gains rates.