When to pay taxes on a flip property

Question

Hi Everyone - I'm looking for some advice on how to report my 2017 taxes as it relates to rehabbing expenses.

I just finished renovating a single-family house that I purchased at the end of July 2017. I own the property in an LLC. Since I started this real estate adventure (in early 2017), I have closely tracked every expense. I have categorized each expense, so it's either a business expense (e.g. credit card annual membership fee, LLC fees, tool for construction that I can use again on future projects, etc.) or a project expense (e.g. labor and building materials for the house I'm renovating, driving directly related to the property, etc.).

I'm putting the house on the market in the next few weeks. I know it's a bit late to be asking for tax advice, but how do I report my losses in 2017? I am assuming I should report all business losses (again, the expenses to run the LLC - those not directly attributable to the renovation property) on my 2017 return, and then I will report my total income (sale price - purchase price + project costs) from the sale in 2018 (assuming it sells in 2018...it better!). Does this sound right?

Full disclaimer, I know this is a forum, and I'm asking only for friendly advice. I realize not everyone is a CPA and not all advice is legally sound. I think what I have here is a fairly common situation, and I just want to hear what people think to make sure I am on the right track. As much as I'd love to sit down with a good CPA and spend $500-1000 doing my taxes, my wife and I try to use Turbo Tax. Obviously, if I ever do a lot of flips, I'd invest in a good CPA...but for my first flip, it's not practical unless I were to run into a complex situation. Ok, I'm rambling. Thanks in advance for the help!

Jon Holdman · Answer

You need an accountant.  You're doing this exactly backwards.  Rather than trying to do your own taxes you should hire an accountant from the start.  They will help you with doing your accounting to minimize taxes.  Once you've done a few with the assistance of an accountant, then you might have enough knowledge to do it on your own.  You're probably spending tens of thousands on this project and hoping for a profit in that range, too.  Spend some money on an accountant.  You're already in a complex situation.

At this point, with only seven days to go I would recommend filing for an extension, paying an estimate, and then finding a knowledgeable accountant.

Everything you spend on that house would add to its basis.  I do not think you can deduct that in 2017.  Even some things like tools might go into the basis for that property.  This is where an accountant will really help in sorting out exactly how to categorize each expenditure.

For 2018, you will need to estimate your taxes that come from the sale of the property and then make quarterly payments.

Alex T. · Answer

@Jon Holdman @Ashish Acharya Thanks for the responses, guys. Look, I get that the best thing to do is hire a quality CPA. I'm with you 100%, and I plan to do just that when my complexity rises. I hope to complete 2-3 flips in 2018, in addition to rental income, so let's assume I will have a competent CPA handling my 2018 return. I'm just trying to focus on 2017. It sounds like there's some disagreement about what can be deducted in 2017. We're not talking about much here. It's between $1,000-$2,000 for LLC expenses that I've deemed as not attributable to the flip. Certainly, you can make a case that everything spent is an asset of the property and goes into the basis because the LLC isn't involved in anything else except this one renovation. Perhaps it's easier - and more correct - to count all expenses towards the basis of the property and thus include them as part of my 2018 return. I have a good grasp of my deductible expenses, and I have clear documentation of every expense, but I don't want to run into a situation where my 2018 CPA says I can't deduct certain 2017 LLC expenses in my 2018 return. So maybe that's a better question. Do you guys believe there are any deductible expenses that I have to report in 2017, or I won't be able to in the year of sale?

Basit Siddiqi · Answer

@Alex T.You can make a case that items not directly or indirectly attributable to the flip are currently expensed. Items like the credit card annual membership fee would fall into this category.

Ashish Acharya · Answer

@Alex T.

Totally understand not getting a CPA so late. I am sure you have done a cost-benefit analysis of not getting a CPA. I dont take customer so I am not saying this to make you come work with me, but paying 1000 for a tax return might save you more than 2/3k on taxes, especially on Flips. Maybe going forward, built that in your deal analysis and as you do more, the cost is even more worth it.  Good thing, we have BP community to help you on the basic level. :)

Regarding your question,

Is you LLC elected to be taxed as S-corp?  It might not be a big deal this year as you have not sold the house yet and its just one house, but if you plan to do more flips, consider electing to be an S-corp if not already. That will save you 15% on Self employment taxes if you started making more than 40 /50k in flips. It's little more administrative than LLC but not that bad.

If you had elected to be an S-corp, some of the market investigation expense not related to flips would be deducted as start-up expense. Same can be argued for an LLC but little riskier.

Yes, you can show administrative expenses ( supplies, postages, memberships and so forth )  to run LLC as an expense this year.  No deduction for the direct cost of flips, including Interest expense on the loan, if any.

Yes, all the direct cost you put in the house are not your deductible expense yet. So that would show up as an Asset in you LLCs tax return if it is MMLLC.

When to pay taxes on a flip property

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