Tax Advice for Flipping

[David Johnson]

Aloha everyone!  I hope all are doing well during these unprecedented times.  I'm looking for quick tax advice on how to file my couple flips and really appreciate your time and knowledge!

General info: I purchased the two properties in 2019 with the intention of flipping under my single-member LLC. I plan to do maybe 1 or 2 flips this year (2020), but we'll see how this economy goes.

Property #1: Purchased in 2019, flipped, and sold the same year for a slight loss of $10k (held the property for less than a year)

Property #2: Purchased in 2019, flipped, and planning to sell in 2020.  (will end up holding the property for more than a year)

Questions:

1. What's the best way to file this?  Do I have to file a Schedule C of 1040 or Schedule D of 1040?  My main concern is that most of my expense for Property #2 is in 2019 and income will be in 2020.  I want to make sure I realize Property #2 P&L in the same tax year.

2. Since Property #1 has a loss of $10k, will I be able to claim those losses?  If so, does it matter if I use Schedule C or D?

3. Depending on how I file Property #2 for 2019 taxes, what could be a negative impact if I chose to convert Property #2 to a rental in 2020 and hold for the long-term?

Thank you so much and Aloha!

[Michael Plaks]

@David Johnson

- You do not get to choose when to report these two properties. #1 is reported in 2019, and #2 in 2020. Cannot change the timeline to offset one against the other. (It is only possible via complicated fiscal year accounting which I do not recommend.)

- Sch C v Sch D for flips is case by case and requires an in-depth discussion. Based on your description of having done two flips already and planning more, it sounds like Sch C for you. Besides, Sch C is more beneficial for you considering you had a loss even before accounting for business overhead expenses like driving and marketing. You should be able to claim your full losses, unless some additional complications.

- Converting #2 to rental will have no negative tax impact, however I'm strongly against considering taxes as a deciding factor when making business decisions. To convert to a rental is a business decision, and taxes should not control it, even if their impact is positive.

- If you convert #2 to a rental and do no more flips, the Sch C is definitely way to go, unless there is more pertinent information than disclosed in your post.