How to report flip fees in LLC tax return

Question

Hi, I know this is a question for a CPA and I will schedule a meeting with him, but in the meantime, I wanted to see for those of you who might already know....

I have an LLC that contains 5 properties and I have been dividing up expenses per property in my taxes for years. I am more actively flipping properties and now there are CHUNKS of money being deposited into the LLC.

How do I report this income? It's not for ONE specific property. If I use that flip fee to pay for other real estate expenses, how is that reported? Again, those expenses aren't for ONE specific property. So how do I break things up?

Basit Siddiqi · Answer

@Robert L.Are all the 5 properties within the LLC, properties that you plan to flip?You normally don't want to hold properties that you plan to flip and those that are buy and hold within the same LLC."house flipping" is the business of buying and selling inventory(houses in this case). This will be reported on schedule C if the LLC is a single member, LLC. If it is a multi member LLC - you may be required to file a partnership return and then distribute a K-1 to each investor.Aslong as all the activity is within one LLC - you just need to file one Schedule C if all the properties were flipped under one LLC. multiple LLC's may require multiple schedule C's.Rental income from buy and hold is reported on schedule E if its a single member, LLC.

Michael Plaks · Answer

@Robert L.I recommend you adjust your terminology to something commonly used in this industry. What you're doing is not normally called flipping or flipping fee. It's called wholesaling and an assignment fee, respectively. Also, talking about your LLC, it's very important to point out that this LLC has been treated as a partnership between you and someone else. I assume it's your wife, but maybe not.Like all of my colleagues pointed out, it's not a good idea to combine wholesaling and rental properties under the same LLC. I join their recommendation to separate it into two LLCs: one for rentals, and another one for wholesaling.But if you continue to use this LLC for both activities, you need to understand that they still go into two separate buckets, and those buckets do not mix. You can have a $20k profit from wholesaling and $20k loss from rentals - but it does not result in you having $0 total income!Those two end up going thru 2 completely different routes on your taxes, resulting in possibly unexpected tax consequences. In my example, your $20k wholesaling income will end up taxed at your ordinary income tax rate plus self-employment tax (Soc Security / Medicare). Your $20k loss may not even be deductible at all, depending on your overall situation. And if it is deductible, the $20k wholesaling income will still be subject to the self-employment tax. Yes, it is confusing.Bookkeeping-wise, you need to be careful to apply your expenses to the right bucket. Some of your expenses will go against your wholesaling income, and others will go against your rentals. Your CPA should explain it to you in more detail.

Eamonn McElroy · Answer

@Robert L.It sounds like you're wholesaling and not "flipping" as it's commonly thought of here.Regardless you wouldn't report on line 4 on page 1 of the 1065. That is for ordinary income passed through from lower-tier partnerships, estates, and trusts, which isn't the fact pattern you're describing...Form 8825 is for rental real estate owned by a partnership or S Corp. If the LLC is holding RRE assets I'd expect them to show up there."There is also a Form 8825 that lays out the profit/loss of each property. If the Form 8825 expenses adds up to a loss for all of my houses, does this constitute as a loss to the IRS (per the 3 out of 5 years loss in their publication that they said you can claim)"You're referring to the hobby vs trade or business determination. History of profit / loss is just one of the tests the IRS will use in making this determination.Tax case law has established rentals can have a long and substantial history of tax loss and still be a trade or business...Highly encourage you to bring a tax CPA or EA onboard as one of your external team members.

Linda Weygant · Answer

I'm with @Basit Siddiqi and @Eamonn McElroyFirst of all, stop flipping (or wholesaling) in your Buy N Hold LLC. You're co-mingling funds and any liability you have from a flip or anything else now opens up all your rental properties to be attached to a lawsuit. But I am not a lawyer, so check with one before taking that as gospel.Second, create a second LLC for flipping (or wholesaling) and run those projects through that. Better yet, think about creating a separate LLC for each flip (but again, IANAL, so check with one before going too much further)Third, consider that you may want an S-Corp for your flipping since that is Ordinary Income (NOT CAPITAL GAINS) and you'll owe not just ordinary income tax on that, but also possibly/probably self employment taxFourth, keep tracking each property's expenditures and matching it against its income when you sell it. You can't deduct ANY remodel expenses related to a house until it sells, so if that project spans over two calendar years, no deducting any of Year 1 expenses until the property sells in Year 2.

Eamonn McElroy · Answer

@Robert L.As @Basit Siddiqi laid out, houses that you intend to flip are inventoriable assets. You should be tracking adjusted basis on your balance sheet and, generally, shouldn't be expensing costs associated with them (should be tracking and capitalizing into the house or houses that cost benefits)."Gains" from flipping are considered ordinary income, potentially subject to SE taxes.Usually they're reported on:-Sch C (if LLC is taxed as a disregarded entity owned by an individual)-Page 1 of Form 1065 (if LLC is taxed as a partnership, or a disregarded entity owned by a partnership)-Page 1 of Form 1120S (if LLC is taxed as an S Corp, or a disregarded entity owned by an S Corp)-Page 1 of Form 1120 (if LLC is taxed as a C Corp, or a disregarded entity owned by a C Corp)

Tom V. · Answer

What is a flip fee? Capital gains made on the sale?

Tom V. · Answer

This is what licensed people refer to as “brokerage commission.” They find someone who wants to sell, and pair them up with someone who wants to buy. It’s a regulated activity that requires a license. Business revenue for your LLC, schedule C on your personal.

Stanley Bronstein · Answer

@Eamonn McElroy is correct. You need a tax CPA or Enrolled Agent (EA) to help you pull all this together.

Robert L. · Answer

Thank you for the responses!My LLC is actually the company that I put for a wholesale flip of a property that I don't even own. I put a property under contract and sold / flipped it to a buyer and collected a "flip fee" (via assigning the contract). I was merely using the LLC as the entity to receive this "income".Thank you @Eamonn McElroy for laying out that this should be reported as ordinary income. My LLC is taxed as a partnership so I see it on line 4 of Form 1065 for reporting "ordinary income". That looks right. There is also a Form 8825 that lays out the profit/loss of each property. If the Form 8825 expenses adds up to a loss for all of my houses, does this constitute as a loss to the IRS (per the 3 out of 5 years loss in their publication that they said you can claim)-OR-since I have this surge of ordinary income from the flip fee that will result in a PROFIT for the company overall, then does this mean that the LLC ultimately result in a profit even though the houses in Form 8825 showed a loss. Does that make sense?