Taxes On Flipping Houses: The 2026 Investor's Guide

Written by

Alex Martinez — Founder & CEO, Real Estate Skills. Has wholesaled and flipped houses for over a decade, personally acquiring 33+ residential investment properties.

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Reviewed by

Ryan Zomorodi — Co-Founder & COO, Real Estate Skills. Reviewed the flipping workflow, entity and S-Corp strategy, and investor guidance in this article.

✓ Updated July 2026 ✓ Fact-Checked 📄 Free Deal Calculator Inside Watch on YouTube

Publication history: Originally published April 7, 2022. Updated July 2026 with corrected self-employment tax mechanics, a new section on how to report a flip (Schedule C & Cost of Goods Sold), a new Qualified Business Income (QBI) deduction section, current 2026 tax figures, and an expanded FAQ. Investor workflow and strategy reviewed by Ryan Zomorodi, Co-Founder & COO of Real Estate Skills.

Most first-time flippers do the deal math and forget the tax math. They see a $50,000 spread between the buy and the sale, mentally spend it, and then get blindsided in April when a real chunk of it goes to the IRS — often before they've paid a dollar of state tax. The tax isn't the villain here. Not understanding it before you buy is what quietly kills otherwise-good deals.

Here's the part that trips everyone up: real estate doesn't automatically get the friendly tax treatment people associate with it. When you flip on any kind of regular basis, the IRS doesn't see an investor holding an asset — it sees a business selling inventory, the same as a store marking up a product. That single classification is why your flip profit gets taxed as ordinary income and picks up self-employment tax, instead of the lower capital gains rates you were hoping for. Miss it, and you can underwrite a deal that looks profitable on paper and barely pays after tax.

The good news is that everything about the tax bill is manageable once you understand the mechanics. This guide walks through exactly how a flip is taxed in 2026, how to report it on the right forms, which costs you can deduct, and the legal levers — the QBI deduction, entity structure, smart use of your state's rules — that decide how much you actually keep. You can grab our free Deal Calculator here to run your own numbers as you go. Underwrite the tax in from the start, and you stop leaving money on the table.

How The IRS Classifies House Flipping Income

This one classification drives your entire tax bill, so it's worth understanding what actually decides it. Most beginners assume real estate automatically gets favorable treatment — it doesn't. When you flip regularly, the IRS treats you as a dealer (someone in the business of buying and reselling property), which means your houses are inventory, not investments. And inventory sold for a profit is taxed as ordinary income, the same category and rates as your regular paycheck, with no access to the lower long-term capital gains rates no matter how long you hold.

There's no bright-line rule — no "X flips a year makes you a dealer" number in the tax code. Instead, the IRS and the courts weigh a cluster of factors, and the more of them point toward "running a business," the more certainly you're a dealer. The main ones:

• Frequency and continuity of sales. One sale looks like an investment. A steady stream of them looks like a business. This is the heaviest factor.
• Your intent when you bought. Did you buy it to fix and resell, or to hold for rental income and appreciation? Buying with resale as the plan points straight at dealer status.
• The extent of your improvements. Substantial renovation done to resell at a markup is classic dealer activity — you're adding value to sell, like any manufacturer.
• How much of your livelihood it is. If flipping is your primary income and your day-to-day work, that's a business, full stop.
• How you present yourself. Marketing as a homebuyer, running it like an operation, holding an entity for it — all reinforce "dealer."

Here's the honest part most pages skip: you don't get to pick. Investors sometimes hear that capital gains rates are lower and try to argue investor status on a property they flipped. During an audit, that argument lives or dies on the factors above and on your documentation — not on your preference. If you flip several houses a year, renovate them to resell, and it's how you make your money, calling yourself an investor won't hold. Plan for dealer treatment, and treat any capital-gains outcome as the exception it is.

Dealer-versus-investor classification depends on the specific facts of your activity and is ultimately a legal determination — this is educational, not legal or tax advice. Confirm your status with a licensed tax professional.

How Much Tax Do You Pay On Flipping A House?

Most beginners look at the gross spread — the gap between what they bought for and what they sold for — and think that's their payday. It isn't. Your real take-home depends on how the IRS stacks your flip profit on top of everything else you earned that year, then layers three separate taxes on it.

Here are the three layers, plainly:

• Federal ordinary income tax. Your flip profit is taxed at your marginal rate (the rate on your next dollar of income), which for 2026 runs from 10% to 37% depending on your total household income. Because the profit stacks on top of your other income, a flipper with a day job pays their higher marginal rate on the flip — not their average rate.
• Self-employment tax. A flat-sounding 15.3% for Social Security and Medicare — though, as the next section explains, it's not actually applied to your whole profit.
• State income tax. Location-dependent, and it swings hard. Florida, Texas, and seven other states take 0%. California reaches 13.3% at the very top.

Stack those together and a $50,000 profit can easily lose $15,000 to $20,000 to combined taxes before you count deductions. That's why you underwrite every deal knowing the IRS is a silent partner — the full worked math is further down, and you can run your own numbers with the free Deal Calculator.

Self-Employment Tax On Flipping Houses

Here's the tax nobody warns you about until it's due. When you flip as a dealer, the IRS treats your profit as earned business income, so on top of ordinary income tax you owe self-employment tax. It exists because of how Social Security and Medicare normally get funded: at a W-2 job, you pay half (7.65%) and your employer quietly pays the other half. When you flip, you're both the worker and the business, so you pay both halves yourself. That's the 15.3%.

But the number that actually hits your return is smaller than 15.3% of your profit, for three reasons the "flat 15.3%" shorthand gets wrong:

First, you don't pay it on 100% of your net profit. The IRS multiplies your net profit by 92.35% — that carve-out mirrors the employer-side share a W-2 worker never sees — and the tax applies to that smaller number.

Second, the 15.3% isn't one uncapped rate. It's two pieces. The 12.4% Social Security piece only applies up to the annual wage base — $184,500 for 2026. Earn more than that from your flips and any W-2 job combined, and the Social Security piece stops. The 2.9% Medicare piece has no cap and rides every dollar. So a flipper clearing $60,000 pays close to the full 15.3% on almost all of it; a flipper clearing $400,000 pays 15.3% on the first chunk and only 2.9% on the rest. Very high earners also pick up an extra 0.9% Medicare surtax above $200,000 single / $250,000 married.

Third, you get half of it back as a deduction. You can deduct one-half of your self-employment tax before income tax is calculated — an above-the-line deduction, so you get it whether or not you itemize. It doesn't reduce the SE tax itself, but it lowers the income the rest of your tax is figured on.

Why this matters for a beginner isn't academic: if you underwrote your deal assuming a "flat 15.3%" bite and you're a high earner, you overestimated the tax and maybe passed on a deal that actually worked. And if you assumed the Social Security cap would save you but this is your only income, you probably underestimated it. Run your own numbers — or better, have a CPA run them — because the self-employment piece alone can be the difference between a flip worth doing and one that isn't.

Educational, not tax advice. Confirm your figures with a licensed tax professional; individual results vary.

How To Report Flipping A House On Your Tax Return

Most people filing their first flip reach for the wrong form. They think "I sold a property, that's a capital gain, that goes on Schedule D" — the same form you'd use for selling stock or an investment property. For a dealer, that's the mistake that starts an audit. Your flip isn't a capital asset. It's inventory you bought, improved, and sold, so it gets reported the way any business reports selling a product: on Schedule C, Profit or Loss From Business.

This walkthrough explains how these forms generally work for a dealer — it's educational, not tax advice. How you report depends on your specific facts, so confirm your classification and filing with a licensed tax professional before you file.

Here's how the pieces actually map onto the form.

The Sale Price Is Your Gross Receipts

Whatever the house sold for goes at the top of Schedule C as business income — not the profit, the full sale price. If you sold at $350,000, that's the $350,000 line. This surprises people; they want to enter their $50,000 profit. That's not how a business reports a sale. You report the whole sale, then subtract your costs below.

Your Purchase And Rehab Costs Come Out Through Cost Of Goods Sold

This is the part beginners miss, and it's the most important mechanic in the section. You don't deduct the money you spent buying and rehabbing the house as ordinary expenses in the year you spent it. Those costs get capitalized (added together and held), then subtracted all at once, as Cost of Goods Sold (COGS), in the year the house sells. Your purchase price, your closing costs on the buy, and every capitalized renovation dollar — the lumber, the cabinets, the contractor invoices — accumulate into COGS. Sale price minus COGS is where your real number starts to appear.

This is why a flip you buy in one year and sell the next can feel brutal at tax time: you were bleeding cash on the rehab in year one and got no deduction for it, because the tax benefit is frozen until the sale. A first-timer who spent $80,000 on a rehab in December and didn't sell until the following year sometimes panics that they "lost" those deductions. They didn't — the costs are sitting in COGS, waiting for the sale to release them. But you have to understand the timing so you don't underwrite a deal expecting a write-off that won't land until next year.

Selling Costs Come Off Too

Agent commissions, title fees on the sale, staging, transfer taxes — the costs of selling the house reduce your profit as well. Between COGS and selling costs, you've now got your actual net business profit.

That Net Profit Flows To Schedule SE

Once Schedule C produces your net profit, it carries to Schedule SE, where the self-employment tax from the last section gets calculated. This is the step people forget exists — they figure their income tax and get blindsided by the SE bill. The two forms work together: Schedule C establishes the profit, Schedule SE taxes it for Social Security and Medicare.

One More Mechanic: Ending Inventory

If you're holding a property at year-end that hasn't sold, its accumulated cost sits as ending inventory — it's not a loss, it's just not realized yet. In the year a property finally sells, its share of inventory drops to zero as those costs flow through COGS. If you're doing more than a deal or two, this is where clean books stop being optional.

A quick note on the "am I even a dealer" question, because it changes the form: if you flip regularly, in the ordinary course of business, you're a dealer and this Schedule C path is yours. Someone who flips a single property once, as a genuine one-off investment, may report it as a capital gain on Schedule D instead — but don't talk yourself into that lane just to dodge self-employment tax. The IRS looks at frequency, intent, and how business-like your operation is, and "I really wanted it to be a capital gain" is not a defense. If you're flipping as a business, file like a business.

Tax Deductions For Flipping Houses

Every dollar you spend on a flip that isn't documented is a dollar you hand the IRS for no reason. In this business your receipts are nearly as valuable as the work on the house — they're your defense against the tax bill. The catch, from the reporting section above, is timing: unlike a rental, where you might deduct a minor repair the year it happens, most flip costs are capitalized into the property's basis and only reduce your tax when the property sells.

One thing you can't deduct: your own sweat equity. If you spend 100 hours painting the house yourself, there's no "labor fee" write-off for your time — you can only deduct the actual cost of the paint and supplies. Here's what does count:

• The property itself. Purchase price and buy-side closing costs (title, escrow) — capitalized into basis.
• Direct improvements. Every 2x4, gallon of paint, cabinet, and contractor invoice that goes into the rehab.
• Holding costs. Interest on hard money and private loans, points, property insurance, and utilities paid during the renovation.
• Selling costs. Agent commissions, title fees on the sale, and transfer taxes — these reduce your sale price.
• Professional fees. Legal fees for title work and CPA fees for preparing the return.

One nuance worth knowing: staging and marketing costs are often treated as selling expenses that reduce your final sale price, rather than general business expenses you claim against other income during the year. It's a small distinction, but it changes when the benefit lands.

The QBI Deduction For House Flippers (2026)

There's a deduction most first-time flippers have never heard of that can quietly shave a fifth off the income-tax side of your profit. It's the Qualified Business Income (QBI) deduction, from Section 199A of the tax code, and it was set to expire until the One Big Beautiful Bill Act made it permanent in 2025 — so it's firmly in play for 2026 and beyond.

Here's the plain version. If your flipping business earns qualified business income — which a dealer's flip profit generally is, because it's active business income — you may deduct up to 20% of that income before your federal income tax is calculated. On $50,000 of qualifying profit, that's up to a $10,000 deduction. You don't spend anything to get it; it's a deduction for simply having pass-through business income.

Two things you have to understand so you don't over-count it:

It only touches income tax, not self-employment tax. The QBI deduction reduces the income your federal income tax is figured on. It does nothing to the 15.3% self-employment tax — that's calculated on your full net earnings regardless. So QBI softens one of the two tax layers on a flip, not both. Beginners who hear "deduct 20%" sometimes assume it wipes out a fifth of their entire tax bill. It doesn't — it's a fifth of the income subject to income tax.

It phases out and has limits at higher incomes. The full 20% is straightforward when your total taxable income is under the annual threshold. Above that, the calculation gets more complicated — it starts getting limited by things like the W-2 wages your business pays and the property it holds, and certain "specified service" businesses lose it entirely at high incomes. Flipping generally isn't one of those restricted service businesses, which is good news, but if you're a high earner the amount you actually get can shrink. This is squarely a "have your CPA run the real number" situation — the concept is simple, the math above the threshold is not.

The reason this belongs in your underwriting, not just your tax return: on a solid flip, QBI can be the single largest deduction you take. Knowing it exists changes the after-tax math on a deal — and it's exactly the kind of thing a beginner leaves on the table simply because no one told them it was there.

Educational, not tax advice. QBI eligibility and the phase-out math depend on your full tax picture — confirm with a licensed tax professional; results vary.

How To Calculate Taxes On Flipping Houses

Numbers make this real, so let's run an actual flip from sale price all the way down to what lands in your account. I'll use a single filer with a $90,000 W-2 salary who flips one house on the side — a common starting point — because your flip profit stacks on top of your other income, and that's what most examples get wrong.

Here are the five steps, then the worked numbers:

1. Calculate your total basis. Add your purchase price, buy-side closing costs, and all capitalized renovation costs.
2. Subtract selling costs. Take agent commissions, staging, and transfer taxes off the final sale price.
3. Determine net profit. Sale price minus total basis minus selling costs.
4. Apply the tax layers. Self-employment tax on 92.35% of net profit, then your marginal federal rate on the profit (reduced by the half-SE and QBI deductions), then your state rate.
5. Set aside what you owe. Reserve roughly 30% to 35% and pay it through quarterly estimates.

One more lever to layer on: if you qualify for the full QBI deduction, subtract roughly another $2,600 from that income-tax layer — but whether you get the full amount depends on your total income, so treat it as upside, not a guarantee. The takeaway a beginner should carry into every deal: the real bite is usually 30% to 40%, not the scary "half your profit" or the naive "just my bracket" — and the deductions you track genuinely move the final number.

This is an illustrative example to show the mechanics — not a filing-ready calculation. Your actual tax depends on your full income, filing status, state, and deductions. Figures are estimates; confirm your numbers with a licensed tax professional.

Underwrite The Tax Before You Buy — Not After You Sell

The flippers who keep their profit are the ones who bake the tax bill into the offer from the start. A deal that looks great on the gross spread can fall apart once the IRS takes 30% to 40% — so you have to know your real numbers before you buy, not after. Download our free Deal Calculator to run your purchase price, rehab, and profit spread in seconds, so you buy deals with enough margin to survive the tax and still pay you well.

Can You Avoid Taxes On Flipping Houses?

Let's be straight: you're not going to make dealer flip profit tax-free. The IRS is too good at its job. But you don't have to pay the maximum rate either — there are legitimate ways to shrink the bill, and there are two "avoidance" strategies people constantly misunderstand, so let's clear those up first.

The 121 primary residence exclusion. There's one legal way to turn a property into tax-free profit, and it's the opposite of flipping fast. Live in the home as your primary residence for at least two of the last five years, then sell, and a single filer can exclude up to $250,000 of gain, a married couple up to $500,000. One of our team at Real Estate Skills leaned on this heavily when they were younger — buy a place, live in it two years, sell tax-free, repeat — a genuinely powerful move for someone without kids who can move easily. But be clear-eyed: this isn't a flip. It's a two-year hold where you live in the house. It's the "slow flip" for people with patience, not a way to shelter a normal fix-and-sell.

The 1031 exchange — and why it doesn't work on a flip. A 1031 exchange lets you defer tax by rolling proceeds from an investment property into another. It's a real strategy, but it's for property held for investment, not inventory held for resale. Because a dealer's flips are inventory, they don't qualify — and trying to force a 1031 on a flip invites penalties. Same goes for the "property ladder" myth that reinvesting your profit into the next flip defers the tax. It doesn't. You owe tax on each flip in the year it sells, regardless of what you do with the money next.

So here's the honest bottom line on "avoiding" flip taxes: for an active flipper taxed as a dealer, the lower capital gains rates and these deferral strategies are off the table — that's exactly the misconception this guide exists to correct. What you can do is legally reduce the bill: track every deductible cost, take the QBI deduction, and once you're profitable enough, elect S-Corp status to cut your self-employment tax. The video below walks through the capital gains landscape and the 121 and 1031 strategies in more depth — just keep in mind, as it covers holding periods, that a regular flip stays ordinary income no matter how long you hold it.

How To AVOID Capital Gains Tax On Real Estate | Pay 0% On Taxes LEGALLY!

Stan Gendlin breaks down capital gains tax on real estate and the legal strategies investors use to reduce or avoid it — including the Section 121 exclusion and the 1031 exchange for long-term investment property.

 

The S-Corp Tipping Point: When To Switch

First, a point that trips up nearly everyone: an LLC by itself does not lower your taxes. Every property Alex Martinez has flipped has been held inside an LLC — but for liability protection, not tax savings. A single-member LLC is invisible to the IRS for tax purposes; you're taxed exactly like a sole proprietor, same brackets, same self-employment tax. What the LLC does is shield you: if something goes wrong on a project, what the LLC doesn't own is what can't be touched. The tax savings people associate with "having an LLC" actually come from the next step — electing S-Corp status on top of it. Get the entity for the protection; make the S-Corp election for the tax math.

Here's the mechanic. As a sole proprietor or single-member LLC, your entire net flip profit is hit with the 15.3% self-employment tax. Elect S-Corp status, and you split that profit into two buckets: a salary you pay yourself, and distributions. The salary is subject to the 15.3% (through payroll taxes); the distributions are not. So every dollar you can reasonably take as a distribution instead of salary skips the 15.3% — that's the savings. On a business netting $100,000, paying yourself a $50,000 reasonable salary and taking $50,000 as a distribution saves roughly 15.3% on that $50,000, about $7,650.

But the salary has to be reasonable for the work you actually do. This isn't optional and it isn't a place to get cute. The IRS explicitly requires S-Corp owners to pay themselves reasonable compensation, and paying yourself an artificially tiny salary to dodge the tax is a well-known audit trigger. "Reasonable" means roughly what you'd pay someone else to do your job.

So when does it pay off? Not at your first flip. The S-Corp comes with real costs — running payroll, a separate business tax return, higher CPA fees — and until your savings clear those costs, you're spending money to save money. There's no magic IRS number, but the working rule most practitioners use is that it starts making sense once you're consistently netting enough that the 15.3% saved on distributions comfortably beats the added administrative cost — often somewhere north of ~$60,000 in annual profit, though the real answer depends on your specific numbers. Run the actual math with a CPA before you elect.

And mind the deadline: to have the election apply for the current tax year, you generally have to file Form 2553 within about two and a half months of the start of that year (or when you form the entity). Miss it, and you're either waiting until next year or filing for late-election relief. This is a decide-early move — you project your flipping volume ahead of time, not in December.

Educational, not tax or legal advice. Entity and S-Corp decisions depend on your full situation — confirm with a licensed tax professional before electing.

Quarterly Estimated Taxes & The Safe Harbor Rule

Flippers don't pay taxes once a year — the IRS wants its cut four times a year, as you earn. If you expect to owe $1,000 or more (you will, on a profitable flip), you're required to make estimated quarterly payments using Form 1040-ES. Skip them and you get hit with an underpayment penalty even if you pay in full at filing.

The four deadlines don't fall in even quarters, which trips people up. They're roughly April 15, June 15, September 15, and January 15 of the following year. Mark them now.

The protection against penalties is the Safe Harbor rule. The IRS generally won't penalize you if you pay, through those quarterly vouchers, at least:

• 90% of what you'll owe this year, or
• 100% of what you owed last year — bumped to 110% if your prior-year adjusted gross income was over $150,000.

Hit either target and you're safe from the penalty, even if you still owe more at filing. The prior-year option is often easier to plan around, because you already know last year's number.

The discipline that makes this painless: the day a flip check hits your account, move 30% to 35% of it into a separate savings account and treat it as gone. That's not your money — it's the IRS's money you're holding until the next voucher is due. Flippers who skip this step spend the tax money on the next rehab and end up scrambling — or borrowing at high interest — when the quarterly payment comes due. The ones who set it aside on day one never feel the deadline.

How Your State Affects Taxes On Flipping Houses

The IRS rules are the same in all 50 states, but your state tax collector is the variable that quietly decides how good a flip really was. Do identical work on identical houses in Florida and California, and your take-home can differ by five figures — not because of the deal, but because of the ZIP code.

Nine states take zero state income tax on your flip profit: Florida, Texas, Tennessee, Nevada, Washington, Wyoming, South Dakota, Alaska, and New Hampshire (New Hampshire taxes some investment income but not earned business income like this, and is phasing that out entirely). Flip in one of those, and every dollar of profit skips the state layer — a real head start.

On the other end, high-tax states take a serious cut off the top. California's top marginal income tax rate is 13.3%. New Jersey, New York, and others run into the high single digits and above. In those markets, the tax isn't a rounding error — it's a cost you have to underwrite. A deal that nets fine in Dallas might not pencil in Los Angeles unless you buy it enough cheaper to cover the state's cut. Wider margins aren't optional in high-tax states; they're the price of doing business there.

Don't stop at income tax, either. Some cities and counties layer on transfer taxes — sometimes called a "mansion tax" on higher-value sales — charged on the gross sale price, not your profit. That distinction is brutal: flip a $1,000,000 home in a jurisdiction with a 1% transfer tax and you owe $10,000 at closing whether the flip made money or lost it. Cities like Chicago, Philadelphia, and New York City are known for aggressive local transfer taxes. Before you buy in a new market, find out what the local transfer taxes are — they come straight off the top.

The move is simple: underwrite your specific state and city's taxes into the deal before you buy, not after you sell. The friendliest deal in a brutal tax jurisdiction can net less than a thinner deal in a no-tax state.

State and local tax rates change and vary by jurisdiction. These figures are current as of 2026 — confirm your state and city's current rates with a licensed tax professional or your state's department of revenue before you rely on them.

IRS Sources For Flipping Houses

Bookmark these. When a "tax tip" you read online contradicts what's on an actual IRS form or publication, the IRS wins — and now you know where to look.

One quick clarification, because it confuses people: a "flip tax" is a different thing entirely — it's a transfer fee some co-op buildings charge when you sell, mostly in New York City, and it has nothing to do with the income taxes on flipping houses covered here.

Taxes On Flipping Houses FAQs

Final Thoughts On Taxes For Flipping Houses

The flippers who keep their profits aren't the ones who found a loophole. They're the ones who understood the tax before they bought the house.

That's the whole shift this guide is built around. Taxes on a flip aren't a surprise that hits in April — they're a known, calculable cost you can underwrite into the deal from the start. You know a regular flip is taxed as ordinary income plus self-employment tax. You know it goes on Schedule C, not Schedule D. You know roughly 30% to 40% of your profit is spoken for, that the QBI deduction and an S-Corp election and a no-income-tax state can each move that number, and that the deductions you track are the difference between keeping your margin and handing it over. None of that is a secret. It's just work most beginners skip.

Treat the IRS like a silent partner in every deal — one who takes a defined cut whether you plan for it or not. Price that cut into your offer before you buy, set aside 30% to 35% of every check the day it lands, pay your quarterlies, and keep clean records from deal one. Do that, and the tax bill stops being the thing that ambushes you and becomes just another line in your underwriting.

That's what turns flipping from a risky hobby into a business. Not the renovation. Not the sale. The discipline to know your numbers all the way down to what you actually keep — and to build every deal around that number instead of the gross spread you see on paper.

About The Author

Alex Martinez

Founder & CEO, Real Estate Skills

Alex Martinez is the Founder and CEO of Real Estate Skills. With more than a decade of investing experience and 33+ residential properties acquired, he has personally wholesaled and flipped houses across the country. Through Real Estate Skills, Alex and his team have helped thousands of students learn how to find deals, run their numbers, and close profitable real estate transactions.

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Real Estate Skills is not a law firm or a tax or accounting firm, and the information in this article is provided for educational purposes only — it does not constitute legal, tax, or financial advice. Tax laws, rates, and thresholds vary by situation and by state and change over time; the figures here are current as of 2026. Real estate investing carries risk, and past results do not guarantee future outcomes. Always consult a licensed tax professional, CPA, or attorney about your specific situation before filing a return or making a decision on a deal.

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