Tenant Labor and converting rental to flip

[Tracey Hamilton]

We just picked up our first property.  We are in Oregon, and we are licensed general contractors.  Initial plan was to rehab and flip the property before the end of 2018.  

We are seeing issues of needing labor help, but not excited about getting workmans comp and running our own payroll, nor excited about paying for employee leasing service.  

Personal friend is wanting to come stay in our area and learn a little construction.  If we rent the home to him, and he lives in it (legally, has utilities in his name, etc.), as a tenant, he can do work on the home without needing to be an employee, correct?  As long as he has the homeowners permission (that's us), he can climb on the roof, remove windows, etc, right? 

Next issue would be once he is ready to move on and we're ready to now sell the house.  IF that happens after 2019 starts, I can see how I'd run the accounting pretty easily - 2018 as a personal rental and 2019 as a conversion and sale.  However, if things move faster, and he is out and we sell during 2018, do I try to separate out the income/expenses/depreciation from when it was a rental, adjust the basis, and then figure the sales profit off the adjusted basis? 

Just to throw another monkey into things, the property was purchased and is currently held in our personal names.  We had thought about having the business (the general contracting business) purchase it before we started the rehab, so as to separate out the dealer status business from us personally.  I'm thinking maybe that should happen AFTER the rental period is up.  

My brain has been swirling with all these issues and possibilities all night, haha.  As if making sure I have all the custom window sizes correct wasn't enough, ha!  

Thanks!

[Ashish Acharya]

@Tracey Hamilton , 

Congrats. 

1) You dont need workman's comp or payroll. You just hire independent contractors. That way you dont need a payroll and look for insured contractors. 

2) if you still dont want to do it, yes you can rent the property to a friend. If he works there, he would still be an independent contractor if you are paying him to do the work. If you are not paying him, and he is doing it for free, either way, you still want to make sure you have an agreement with him on payment and enough protection to cover your liability. He falls, and he can sue you. Your permission has nothing to do with it. 

3) Selling this property might be little more complicated. It can be either ordinary gain or capital gain ( short term if you sell before a year)depending on how you plan and document your intent. If you sell within a year, intent might not matter that much because both ordinary and STCG are taxed at the same rate. ( I am assuming you dont have a capital loss that could have been used by capital gain and you dont have pay 3.8% Net investment income tax based on how much you make).

4) however, if you rent it out for more than a year, and sell it, and if you have documented you intent property, you would be paying Long-term capital gain rate.  

5) no matter when you sale, you have to report rental income and adjust the basis as you mentioned. 

6)I would not transfer the property in the GC business, for liability reasons. And when a rental is up, why transfer, when you are going to sell anyway. 

 If you are not in the business of selling properties already, dealer status won't come it just yet. That is why I mentioned, since this is your first property, if you document your intent to hold the property and sell after a  year, you will pay Long-term capital gain.  

I can tell from your question you might be a little confused, I am sorry this post made it more confusing. let me know if you want to talk, I can explain it much better on the phone.