How to properly report flipping and leasing properties to Schedule C?

[rodrigo]

I got a new client today and since I do not agree with the approach from his previous preparer, I wanted to review my thinking first to get things right. My brain is still fried after all those extensions.

Client buys neglected properties mostly with private loans, fix them himself (has a contractor license) and put them on month-to-month lease while listed for sale. Some of these properties are later acquired in an installment sale but some kept on lease sometimes for years.

For 2022 he had a total of 5 properties: 3 on lease and 2 were sold.

For 2023 he had a total of 9 properties: 4 on lease and 3 were sold. The other 2 were just not leased yet.

Everything will go to schedule C, SE Tax on rental income & gain on sale, properties & improvements to inventory until sold. Correct?

Is he allowed to claim depreciation expenses on the leased properties?

Because of the installment sales how should I treat the inventory at the end of the year?

Please give me your opinions and thank you.

And Free IRonMaN now! ...… oh never mind 👍

[IRonMaN]

I was on board with your plan if the properties were rented real short term, but then you went and threw a bump in the road --------------- some of the properties are rented for years.  Are those properties just tough to sell or is the rent so good that he likes that revenue stream so he isn't interested in selling?

[Terry53029]

 If you are in a business of flipping houses, then all aspects of the sale will be reported on form Schedule C, Profit or Loss From Business.  On a Schedule C, you will report the gross income as your sales price and the basis will be your cost. You add improvements to basis, and you do not depreciate anything. Ending inventory is his cost of any properties not sold yet. Not sure of your question "Some of these properties are later acquired in an installment sale but some kept on lease sometimes for years,  are you saying a buyer or your client acquired the properties in an installment sale (if sold on land contract, title usually doesn't change hands until paid in full).

[TaxGuyBill]

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@rodrigo wrote:

Everything will go to schedule C, SE Tax on rental income & gain on sale, properties & improvements to inventory until sold. Correct?

Is he allowed to claim depreciation expenses on the leased properties?

Because of the installment sales how should I treat the inventory at the end of the year?👍

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Yes.  Unless there is evidence that the property is not "primarily" for sale.  But the fact that he immediately puts it up for sale and only does month-to-month contracts makes it seem "primarily" for sale to me.

No (with the same "unless" as above).

It was sold.  It is no longer part of inventory.

[rodrigo]

They are not the best properties per se and they are all located in the same slow market. I can see the history for the MLS listings getting on and off, so I believe he is interested in selling but hard to find the right buyer.

[rodrigo]

The new buyers pay in installments.

I wasn't sure if he can claim the depreciation because he is leasing the properties month-to-month before he sells them.

[rodrigo]

So, it doesn't change anything the fact that the payment is in installments. Got it.

[qbteachmt · Accepted solution]

What your taxpayer seems to be is a flipper and real estate professional, all of which is Sched C. If a property is never listed for sale, that would be the rental that is their operational asset with depreciation.

Selling as a cash out or selling as "carrying the note" doesn't change the nature of the sale and doesn't affect the property. It is a cash flow difference.

As for the length of time holding a property for sale, but going ahead with having it occupied, I found you a good reference that explains in some cases, it should be held at least 90 days, for FHA/VA buyers. Read this article:

https://newsilver.com/the-lender/how-long-do-you-have-to-hold-a-house-before-flipping-it/

I have never seen a firm definition from the IRS on "how long to hold flipping property is too long." For example, a widow/er can sell up to 2 years and still be considered to have the FMV from date of death.

If you have the market comparable that homes can take perhaps 2-3 years to repair and be on the market, then having them occupied doesn't turn them into working asset. Occupancy might be the best way to protect the improved property in that area. They would still be inventory, which doesn't depreciate. The cost on hand still is the cost on hand. Once it sells and the tenants vacate, there might be some further investment for repairs or required change per the buy/sell, which goes into basis.

[rodrigo]

Thank you all