Tax Law (Questions About Taxes)/Gain on "flip"

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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.

Thanks,
Steve

Answer
Steve,

Thanks for your question.

Someone who is in the business of flipping houses – buying houses, fixing them up, and then selling them for short-term gain - is considered to be a dealer by the IRS.  The dealer holds real estate in the ordinary course of business and anticipates a very quick turnover and profit.

The real estate dealer is taxed very differently from the investor.  The dealer may be taxed at individual income tax rates up to 35% and may also be subject to 15.3% self employment taxes.  Dealers cannot transfer property through a 1031 (like-kind) exchange, cannot use the installment sale method, and cannot take deductions for depreciation.  Regardless of how long the property is help, it is considered inventory, not subject to capital gain treatment.

This would all be reported on Schedule C and you would include the costs of purchasing, maintaining, and repairing the house.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

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I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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