Capital gains Short Term

[MR_SERVICES]

I'm trying to figure out Capital gains from the sale of a rental property. The client bought the property and " flip it "  with help of an investor, they went 50/50 on improvements of the property with the agreement that when it sells they distribute gains the same way (50/50). The property was rented for less than a year so it is a short-term sale. 

after closing the sale, the title company deposited (with seller approval)  the money to 2 bank accounts 50%to the property owner and 50% to the investor. Here is my question how or where do I enter gains that were distributed to the investor? my client receive a 1099-S for full sale amount 

[dkh]

The term "investor" makes me think your client borrowed funds to buy then improve this property.  Therefore, the distribution to the "investor" wouldn't be entered anywhere.  Same as a payoff to a bank wouldn't be entered.       However, you say they went 50/50 on improvements. So is there an investor or a co-owner.   Who paid for the property?  How are you reporting the purchase of the property?  How are  you reporting the cost of improvements?

[BobKamman]

I'm not sure you have any capital gains there.  It sounds like a business that goes on Schedule C, even with rental income that suggests significant services were being provided to the tenant while the property was being fixed up.  Or, it sounds like a partnership and you're late filing a Form 1065.  Whose name was on the deed?  Probably not the "silent investor."  It's irrelevant where the proceeds were deposited.  You could tell the escrow company to wire some money to pay off the credit card used to buy new appliances, but that doesn't mean American Express pays tax on the sale.  

[abctax55]

"...The property was rented for less than a year so it is a short-term sale. "

That's completely irrelevant UNLESS that is also the time owned.

[qbteachmt]

"The property was rented for less than a year" <== income/expense operation for the Owner of record

"so it is a short-term sale." <== short- or long-term is from Purchase date to Sale Date; not Occupancy dates

You have two different activities, if you don't consider the Flipping as an income activity and instead as investment activity. Do you know the difference, for Flipping?

[MR_SERVICES]

hello, 

maybe I used the term investor in the wrong way. My client is the sole owner of the property( 1098 ), as you said he only borrowed money to make improvements. the improvements were reported as assets for depreciation. 

[MR_SERVICES]

the property was owned for 11 months rented for 9.

[qbteachmt]

Let's understand this part: "the improvements were reported as assets for depreciation."

Assets are something I invest into.

Depreciation is an allowance as consideration for the fact that the asset in use wears out over time.

You can Improve property and that part would Depreciate, such as, having a Rental and putting some improvements into the property for the renting of it, and then someone lives there as the tenant.

Assets you Improve, and then Sell, never depreciate, because you are not using them. That means they are not wearing out. Think of improving the property as the same as buying inventory = it is In Stock and available for sale, once it is done and ready for sale.

So...

Rental activity can have expenses of operation, can have Improvements that depreciate, and should have Rental Income.

Property being Flipped has almost no Expense in this activity, because all the funds expended are being Invested. The property For Sale that isn't occupied, means nothing is depreciating.

And the significant determination to make for Flipping =

Does this operation rise to the level of being a business for your client? Did they do this work, intending to do more, and they have done one or more in the past, and (for example) they did the work themselves, or did they act as a general contractor? When you have this as an operation with intent of profit, the Flipping is a Business = Schedule C, with income and expense. Expense for the Cost of the property sold against Income from the sale.

Or;

There is no intent to do it again and it's not something they do routinely or even on occasion. An example is a landlord buying a place for a good deal that looks like a profitable rental, fixing it for occupancy, and unexpectedly getting some ridiculous offer to buy it and that is a Capital Gain activity.

[dkh]

So your client purchased a rental property, did improvements which were depreciated, rented out the property for 9 months, then sold it.    Sounds like a Schedule E is required for rent income, expenses, depreciation.  And sale of the rental property is required to be reported - the sale information would be entered on the Asset Entry worksheet.     

[qbteachmt]

"purchased a rental property, did improvements which were depreciated, rented out the property for 9 months, then sold it."

Ah, mind reading. What a great skill.

Yes, the sequence of events makes a difference.

And depreciation would start when the improvements are in use, but with this tight timeframe, if all of this happened in 2020, there would not be both depreciation and recapture and sale.

Yes, details matter.