Tax question-flip turned rental-HELOC loans deductible? & other Q

[Seth Rouch]

I would like to preface that I've already sent this to my CPA (so please don't suggest "Contact your CPA") I'd like to hear from the BP community and your ideas and thoughts. Thanks in advance!

Scenario 1:

A flip - turned to rental (numbers didn't make sense to sell after rehab). We have 2 HELOC loans that paid for the renovation and the down payment. When we sell, some of the profits will end up paying those loans off. Will the pay off of these loans be tax deductible? Will the profits ALL count as profit- regardless of most of it going to pay off loans made on the property to create said profits?

Scenario 2:

Owner carry tax implications. Owner wants $X amount of dollars from the sale and anything after that I would recoup renovation costs and then profit. What do the tax implications look like for this scenario? Any input you may have as to why this may be a good/bad idea etc. is always appreciated.

[Dave Toelkes]

@Seth Rouch

1.  Borrowed money that you repay is not income to you nor is the repayment of the loan a deduction.  All your profit on the sale of the flip is taxable as ordinary business income subject to self-employment income taxes no matter what you do with the proceeds of the sale.   

2.  Your cost basis for this flip is $X plus your renovation cost.  The difference between your cost basis and the net sale proceeds is your taxable profit.  Tax on flip profit as in scenario 1.

Your use of the term "profit" is not quite correct.  Profit is not the amount of money you receive from the sale of a property.  Profit is the amount of money you have left over from the sale of a property after you recover your acquisition and rehab costs.   Buy a property for $75K, spend $25K in rehab, then sell for $135K.  Your profit is $35K ($135K - $75K - $25K).