Flipping Houses

[taxu2]

Client is beginning to flip homes and I am wondering how to report this correctly. He is buying and selling in under a year on a few homes to start with. Bought in one tax year and selling the next. Would this be reported on Sch C and how would the income and expenses be reported? Any guidance would be greatly appreciated. 

[Jim-from-Ohio]

Goes on a Schedule C.  for homes not sold as of year end, the costs are part of year end inventory. 

[taxu2]

Ok, thank you. It's his first year and he is not selling any this year so would I just list the amount paid for the homes as the closing inventory? And the expenses, such as interest, taxes, materials, tools, etc. Would I just deduct them as I usually would on a Sch C? 

[Jim-from-Ohio]

So for this year since there are no sales all of those costs you mention would be considered part of inventory.

[Terry53029]

Is he just flipping houses as an investment or is he buying, and fixing, then selling. When preparing the tax return for a TP who buys and sells real estate, it is important for tax purposes to determine if the taxpayer is an investor in real estate or is operating a business that buys and sells real estate, and does it rise to IRC section 162, a trade or business is an activity conducted with continuity and regularity and has as its primary purpose earning income or making a profit. In determining whether or not an activity rises to the level of being a section 162 trade or business

[athaureaux6]

Hello 

He is going to be considered a Real Estate Dealer for the IRS. If he did not sell anything I would recommend that you capitalize all the expenses in the Ending Inventory in COGS in Schedule C so when he sell them it will help him to reduce the gains. I have a couple of those clients and what I do is that I detailed the houses being flipped individually assigning a number, for example House 1, make sure you write a brief detailed of the house, such as address, purchase price, etc. Then when you go to expenses, labor, materials, etc you match each expenses with the corresponding house. The purpose of that is to have a control for next year because maybe it he bought 3 houses for example, and next year sell 2, you know which expenses are which, remember the ending inventory will transfer the amount to next year. It is like an organization tools what I just explained. Maybe somebody has a better way, but I learned this way from some real estate tax preparers years ago. Remember, no depreciation allowed for RE Dealers (flippers) thank you. 

[taxu2]

This I am not sure. I will get with him and do some further research and advise. Thank you. 

[taxu2]

TP advised he bought 1 home last year and is selling this spring. He purchased 5 other homes this year and plans to rent those. He currently does not have any solid plans to buy and sell but if he finds a good deal he may buy and sell a house or 2 a year. Should I report the rental on Sch E and do the sale of home on Sch D short term capital gain? 

[Terry53029]

Does your client have a job, or another source of income ?

[taxu2]

Yes, he is a full time employee at a company. This will be his first time purchasing real estate for sale / rent. 

[Terry53029]

Being he is not making a living in real estate I would not think his dabbling in real estate rises to a level of business activity. I would put the one house he bought, and is selling on schedule D (investment). The homes he is buying, and renting out I would put on schedule E (residential rental). flipping house is a full time endeavor to be a business on schedule C, but that is my opinion, and each case has to be looked at to determine which way to go.  

[IRonMaN]

"flipping house is a full time endeavor to be a business on schedule C"

But a lot of folks have side gigs that we put on schedule C so I don't think you have to be doing it full time to be considered a schedule C activity.

[Terry53029]

I agree with you ironman that it doesn't have to be full time to be considered to be a business, but in this instance I don't think it should be on a schedule C. 

[qbteachmt]

"And the expenses, such as interest, taxes, materials, tools, etc. Would I just deduct them as I usually would on a Sch C?"

No.

Understand that those are not expenses. They are invested in the project(s). You have multiple projects, so that means a holding period for properties that get listed for sale, and over the year end, the invested costs are inventory (in the asset). That includes, for example, engineering, drafting, permits, etc. He needs to break down everything by property. This is called CIP = construction in progress. It isn't amortized. It's held until sale date, then the CIP is COGS, along with selling costs.

There will be some operating expenses, such as worker comp insurance or licensing, and some hand tools and consumables (no different than office printer paper, as an example). Any larger equipment, like a construction site trailer or a highlift, are part of business assets. But, another example, renting a highlift or cherry picker or crane to fly in trusses, etc, would be tracked by the project, not as part of operations. Paying subcontractors = project specific. That also means 1099 issues, lien releases, oh what fun.

Any project he then decides to rent out is treated differently, too. Now he is using that asset in operations, so it becomes a fixed asset, not an inventoried asset.

You're going to want to get up to speed on construction and flipping. Based on: "buying and selling in under a year on a few homes to start with" that is operational as Sched C, not investment as D.

[Terry53029]

@qbteachmt  original poster said ". He currently does not have any solid plans to buy and sell but if he finds a good deal he may buy and sell a house or 2 a year". Does not sound like his intensions are to flip houses, but to buy for investment.

[IRonMaN]

But this is the opening line to this fairytale:

"Client is beginning to flip homes" 

As is common here, sometimes it takes a while for the whole story to come out before we figure out the happy ending. 😁

[qbteachmt]

And there's no such thing as only a little bit pregnant.