Lost money on a flip in 2016, how does it impact taxes?

[Brandon Schlichter]

Bought a house mid 2015, did rehab work on it over several months, sold it in 2016 at a total loss of $25k or so.

My question mostly is whether that loss can be depreciated or carried over several years, or has to be taken off only on my 2016 tax return. My goal is to take it off over several years, as with our growing income each year, it would be more beneficial.

[Mark Fedorov]

It depends on how you bought the house and if it were active of passive income, as long as you have the income to offset the loss, you are fine taking it in one year, actually, most people would want to take that in one year, (and the soonest year possible). Why would you carry forward a loss, if you have the option to get cash back (or pay less cash to) the government now?... 

[Brandon Schlichter]

I have plenty of other deductions for 2016 and would much rather depreciate over a few years rather than one.

[Samantha Klein]

@Brandon Schlichter I would want to do it over several years also because if you take it all in one year, depending on your income level, you might not look good on paper for more loans if that's your intention. You have to plan your taxes around your investment goals, sometimes that means paying more taxes than you legally need to but it's a give or take balancing act, pay more taxes, get loans or don't pay as much in taxes but also don't get additional loans, I would rather pay the taxes and grow my portfolio.

[Jim Kennedy]

@Brandon Schlichter 

I am a CPA who does tax preparation AND planning for several hundred investors annually, and I am an investor myself, owning and operating a series of residential and commercial properties here in Southern NJ. While I worked at the IRS for a couple years, I got familiar with the Internal Revenue Code ("IRC"). IRC section 1222 defines  capital losses, which is what you have. 

Most taxpayers (those with less then $5,000,000 in revenue for three consecutive years, like me, and maybe like you) are required to report on the cash basis, which is where you recognize taxable income or loss when the money hits your hand. You must recognize that loss for the year in which you closed the deal. Sadly, you do not have the option to defer it. That's actually a good thing though because depending on the rest of your return, it either lowers your tax due at year end or it increases your refund at year end. You have income coming in next year? Don;t worry. Things will be different next year with a new President, so theres plenty of time to properly plan for that.

The only way it can benefit you in the future is if it offsets all of your other income and results in "negative income", ie you have a W-2 for $22K, you lose $25K, so basically you have negative income. This is referred to as a "Net Operating Loss", or NOL. That $3K NOL can applied tpo another tax year. First you can go back and apply it to the last year or the year befroe that, or you can elect to forego the carryback and apply it to next year. 

Is it possible for you to have that little taxable income and do a flip? Sure it is. I know nothing about you. You may be collecting a pension in your 40's that is not taxable. You may be collectiing Social Security not taxable. You could be making a lot more than your day job, so I figured'd I throw in the NOL info just in case because a good CPA will probe and ask questions to uncover helpful planning information. In addition to doing tax planning with many clients, I also perform financials statement audits. Both hats call for the ability to ask probing, open ended questions - in auditing to identify amounts correctly, and in your case, to do proper tax planning and use the IRC to your fullest advantage.

Not the best news for you, but I hope it helps.

Jim Kennedy, CPA