How to do taxes on Property Development

[Lucy Can]

We bought a single family home near downtown Denver, gave it to a builder for constructing a duplex after doing a quit claim to an LLC in 2018. The Duplex finished building in Summer 2019 and we sold it in fall 2019. We got a 1099-S form for our LLC regarding the sale of each side of the duplex. I am using turbotax to file my taxes in 2020. In Turbotax I was reporting the sales under "Sale of Business Property" by reporting the sale price and the basis as the price of the land plus plus enhancements from the builder. I called the Turbotax CPA support to make sure that it is the right place. They are trying to convince me that this is a business and I need file Schedule E with expenses and profit. Turbotax support is claiming that I need to retroactively add the land as an expense in previous tax returns. Further more I need to issue 1099-misc to anyone that has anything to do with the property.

Almost all the work was done by the builder by doing a draw from a construction loan. After the properties went under contract we made some concessions in terms of electronics, smart home equipment, doors and locks etc.

Does it not make sense to file for taxes under  Sale of Business Property, since the property was bought as a single family and converted into a duplex? Or do we have to file for taxes using Schedule E for business.

Any help is appreciated. 

[Linda Weygant]

Completely agree with @Eamonn McElroy.  You appear to be in way over your head and there is not enough information here to really guide you effectively.

But just some points.

1.  No, you are NOT selling a business asset.  A business asset is something that is used within a business to help generate income.  Examples would be a printing press, a sewing machine, a computer or a tractor.  In the example of real estate, a business asset is a house that is generating income by placing it in service, such as a rental property.  The asset generates the income.  SELLING the house in the manner that you are describing - where you buy it, fix it up and then sell it is completely different.  

In this case, it's no different from buying computer components, assembling them and selling a computer.  Or buying bread, meat and cheese and selling sandwiches.  From the IRS perspective, these are all exactly the same business.  Selling a sandwich is NOT selling a business asset and so selling this property is also not selling a business asset.

2.  Which form to use.  Probably not a Schedule E, but could be a Schedule C if it's all within your personal return and this project was a joint venture.  But if this was a partnership or an incorporated business, it could all be on one of several forms.  The TurboTax expert was sort of half right.  Definitely not a business asset, but probably not a Schedule E.

(PS - you'll also be paying Self Employment Tax on the profits - flipping is a business, not an investment).

3.  1099s - it's tough to say who should have issued the 1099s.  It depends on which entity issued the checks.  If the contractor paid the subs out of their own checking account, then they issue the 1099s and you issue a 1099 to the contractor.  If the contractor paid the subs out of an account that is a partnership account or you are somehow an owner or signer of, then there is joint responsibility for this.  If the bank paid the contractors directly out of construction draws, then it depends on the agreement with the bank.  Some banks will do the 1099s, some will push the responsibility onto you.  Your best bet is to ask your general contractor if they issued 1099s.  (Probably they did)

4.  Adding the land to previous tax returns - not really necessary.  You're fine on that.  Make sure you didn't deduct any land expenses though.  Those are deducted the year you sell, not as you go.