Tax Law (Questions About Taxes)/Flip Treatment
QUESTION: My partners & I formed an LLC to purchase, rehab & sell a property. It took over a year (from purchase date) to "cash out", although some renovation costs were incurred within one year. There were also carrying costs. I am confused as to whether this is reported on Schedule D, or form 4797. Is a 1099B required to report on Schedule D? Also, can I just add the rehab costs to the basis to determine the gain? Using 4797, there would be multiple sales as each component of the renovation would in fact be another acquisition. Also, there should not be depreciation as it is not a rental property.
At first look it appears that the LLC (either a partnership or a corporation) was formed to purchase run down property, rehab the property, and then sell the property. Therefore the property is inventory offered for resale. The cost of the inventory is the item (building), repairing, and sprucing up the look of the property. Since the property is an investment and the investment is held over six months it is a long term investment for tax purposes. The question becomes will the IRS treat your LLC's inventory as any other storefront business where the cost of the item is deducted from the sale of the item and the difference is ordinary income or will the IRS treat it as investment income and allow you to consider it to be investment income.
The answer I believe can be determined if you and your members were actively managing the repairing the property or did you hire out the work on the property an your role was as an investor in the property.
Therefore the the profit and loss pass thru from the LLC to the members tax return will be dependent on how the information returns of the LLC are completed. The two forms listed above are some of the forms that maybe used among others that could be used to report the income or loss from the sale of property.
---------- FOLLOW-UP ----------
QUESTION: We were passive investors only and it was a one timer.
On your personal return the information passed to you from the LLC will be treated as it usually is for an investor in a partnership or corporation. The LLC return will have disposed of the purchase and sell of the property with all the other cost associated with it.