List purchased properties on Schedule C not yet sold?

Question

I have been told by a number of CPAs that it's fine to go either way whether to list properties I purchased and have invested/rehabbing them, but have not yet sold in 2019 tax year. Either list them under inventory on the Schedule C or not list them at all until sold in 2020. Any other wisdom on this? I have a number of houses I bought in 2019 that have not yet sold but I've pumped a lot of money into them in 2019, 2020. I did list a few of them and see in TurboTax that it does near nothing on my tax refund (enough losses due to a lot of new activity in 2019).

David M. · Answer

@David de Luna

I sort of second Teri Feeny Styers answer in that it depends on what you are used to.  I'm so used to Excel that I seem to "over" use.  Accountants and CPA's don't understand how I can do my bookkeeping and prepare my own tax returns without something like QB and TurboTax.  I just have my sheets setup where I make the book entries, and all the numbers are basically summed up for me.

It really just depends on what you are used to using and are more comfortable.  While I haven't used QB, I've seen some of it.  I feel that "program interface" gets in the way since I can see what I what faster and cleaner on my Excel sheets or summary sheets.  Of course, I set it up for exactly what I wanted..

Good luck.

Ben Day · Answer

@David de Luna

Dave crushed it.

Just to reiterate - no one should be claiming flip costs as expenses until the property sells. Not only is it flat wrong, but you’re putting yourself on a tax rollercoaster of huge “losses” in one year and huge “gains” with taxes in another. Nobody likes that.

Bookkeeping for Flips is fundamental. If you can work the system to qualify (or avoid qualifying) as a dealer, that’s totally up to you and your tax planner.

No legal or tax advice given.

Dave Toelkes · Answer

@David de Luna

i am assuming that your intent was always to flip these properties.  If this is the case, then your tax return does not reflect these properties as"acquired" in your inventory until the year of sale.  If you acquired the property in 2019 and flipped it in 2020, the property "acquisition date" on Schedule C would be Jan 1, 2020.  It would appear that the CPAs you are talking too are not well versed on the tax treatment of dealer realty.  Bottom line, you do not have any recognized flip inventory or any direct property expenses on your tax return until the year of sale, and then only in the year of sale.  At the end of the tax year, your cost of inventory on hand reported on Schedule C will be $0.

Your bookkeeping is another issue.  You DO want to add the flip properties to your bookeeping asset inventory as they are acquired and accrue all direct property costs you incur until the property is sold.  In the year of sale, your Cost of Goods Sold for the flip property is the total accrued cost of the property to include acquisition cost, repair/rehab, maintenance, and other holding costs such as property taxes, insurance, and utiilities.

While dealer realty is considered merchandise (inventory) to your flipping business, the tax treatment of your inventory is not the same as for a traditional retail business such as a hardware store.

Just how I see it.  Don't hire a CPA who can't answer this question correctly.

Teri Feeney Styers · Answer

@David de Luna I learned QB for a job I once had and never looked back. It is just so easy to find what you need - search by vendor, search by class, balance checking to the penny, etc. Reports on all sorts of things in a few seconds - and quick professional looking documents to share; and I like that I can export to Excel to tweak if I need to. I'm such a nerd that I use it for our personal finances too. It doesn't feel 18 wheeler to me - it feels nimble.

David de Luna · Answer

Thanks, guys. GREAT info. Much appreciated.

Dave Toelkes · Answer

If QB seems too daunting, Quicken Home and Business gives you the much of the same functionality as QB, exports to Excel and to TurboTax, but may not have all the extra bells and whistles as QB.  I find that it does everything I need for my rental property activity.  I have tried QB and find the user interface a bit easier in Quicken.

David de Luna · Answer

Thanks, guys, great feedback. I appreciate it.

David de Luna · Answer

Thanks so much for your feedback. Way back in the day when I had a computer consulting business, I used QB. But that was 20 years ago. I hear a lot of people say using QB is like using an 18-Wheeler to go to 7/11 for a slurpee. I'm looking for simple, but I did enjoy using QB back then. Can you tell me more about what you think of QB to run your flipping biz? I appreciate you.

Teri Feeney Styers · Answer

@David de Luna I am a flipper. I use Quickbooks. I keep each property I am working on in its own "class" on QB. While I enter expenses in the checkbook and assign them to the appropriate class, and each house is shown on my Chart of Accounts as an asset, as far as my taxes go, I don't report any expenses until I report the sale. The majority of expenses can't be claimed until the sale anyway; so I just find it cleaner to corral it all into one tax year.

David M. · Answer

@David de Luna

Yeah, its not quite a cash or accrual accounting issue.  Well, it could be the latter but you'd have to be doing a lot of business....  I'd have to look back if the date of sale and purchase for a flip is reported as the same, but the idea is the same.  As long as you aren't doing accruals, your income and expenses are deferred until you finish.  I don't have time to look for it right now, but there was an applicable ATG that my cpa gave me to reference that explained all this.  You can't really use the inventory section because you aren't a "hardware" store as Dave Toelkes says.

List purchased properties on Schedule C not yet sold?

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