Flipping- Repairs in 2018 are cost basis for Sale in 2019?

Question

Background: Created LLC partnership in 2018. Purchased a Home to renovate in 2018 and sold it in 2019.

Purchase Price: $60,100 In August, 2018

Renovations:      $30,000

Utilities:               $   2,000

Property tax:      $   2,000

Total Spent in 2018  was roughly $ 94,100. House Closed today ( March 19) for $135,000.

I was under the impression that the expenses we made in 2018 ($34,000) would be added to our cost basis to offset the profit in 2019.  My accountant tells me I must report the expenses as a loss -$34,000 in 2018 and the costs could not be carried over. Then my profit in 2019 would be $74,900 (minus closing costs of the sale).

I am wondering if what my accountant is saying is accurate?  I have tried to read IRS publications that mentions "rehabilitation expenses increase your basis."  So must I suck up a large loss and gain or is it time to find a new accountant?

Sincerely,

Nate

Linda Weygant · Answer

Can you go to your boss and tell him it's only a part time job and ask him to tax it differently?

Doesn't matter.  The issue is intent, not your level of dedication or attention.

Think of it this way....

Capital gains is what happens when you buy an item and it generates income for you while you own it.  Like rental income or a stock (which is supposed to produce dividends....whether dividends are historically/currently declared or paid is moot to this discussion)

A capital transaction has an underlying concept where the asset itself generates its own income.

With ordinary income, the only way to generate the income is to sell the asset.  That means it is an ordinary activity because you're just buying and selling inventory.  Improved inventory to be sure, but still it's just inventory.

It's like if you buy widgets and screws and whatever and assemble them into a bigger widget and sell it.  That's all you're doing with a flip and the IRS taxes it in exactly the same way.

Linda Weygant · Answer

This is incorrect.  Unless you can prove intent otherwise, flipping is ordinary income, not capital gain.  I don't know where this whole concept of a dealer vs not a dealer came into play.  It sounds like the rules surrounding buying and selling cars.  If that's the case, cars are not houses and there's no concept of a "dealer" with regard to houses.

The IRS does not care if you buy a house, improve it and then sell it or buy bologna and improve it by adding bread and selling sandwiches.  It's the exact same business model and the exact same taxes - ordinary income and subject to self employment taxes.

Flipping is not investing.  It's a job.

Linda Weygant · Answer

+1 to @Ashish Acharya's response.  Your accountant has no clue and is a danger to him/herself and others.

Ashish Acharya · Answer

Find a new accountant.

Dan S. · Answer

@Dan Schwartz

Thx @Linda Weygant spoke to accountant and switched me to dealer for filing!

Dan S. · Answer

@Linda Weygant I like the way you explain things. Thank you.

Dan S. · Answer

@Linda Weygant - but what if it is a part-time job? And, what if it is only 1 flip a year? Doesn't matter?

Linda Weygant · Answer

I'll save you a little time.

The "Dealer" status has to do with buying and selling unimproved land.  There is an entire set of facts and circumstances as to whether or not you are a dealer, so I won't get into that.  But essentially, if you are a dealer and you sell a plot of land for a loss, you are allowed to recognize that as an ordinary loss.

If you are an investor, then you recognize it as a capital loss.

Same with the profits.  A sale of UNIMPROVED land sold at a gain for a dealer is taxed as ordinary income.  If it's an investor, then it's capital gains.

That's it.

"Dealer" does not apply to flipping or improved land or anything else.

Flipping is a job.  It's taxed like a job.  There are things you can do to lower those taxes, but unless you can improve that you intended to hold the property to generate income (hold it as a rental), then it's going to be ordinary income.

Dan S. · Answer

@Linda Weygant thanks for your reply - looking into it more

Dan S. · Answer

Right - as I understand - it's a capital gain, short term (you are not a dealer), and the net profit on the entire project is reported on your taxes in 2019  (this is how my accountant explained for my flip).

Flipping- Repairs in 2018 are cost basis for Sale in 2019?

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