Today TaxMama hears from Marina in the Tax Quips Forum, with this situation. “Two separate clients have purchased houses to flip in 2010. One is a R.E. agent the other is the owner of a construction co. (C corp). Both have purchased a house, and after renovating them, both were able to flip their houses at a gain in 2011.
Each client created an LLC and purchased the house under their LLCs. So my question is, which form do I need to fill out for 2010? I don’t think I can use Schedule E because neither house was a rental. Am I correct?”
Since the LLCs are single-owner LLCs, the easiest way to handle this is to treat them as disregarded entities. Where do you report the sales? You’re right. Not on Schedule E. These are not rentals. However, they are investments.
If they have each only flipped one house for the year, report the sale on Schedule D as a short-term capital gain in 2011. Be sure to pick up all the repairs and clean-up costs, and utilities. Add the cost of property taxes, and all fees to the basis. Nothing will be expensed.
For 2010? There’s nothing to pick up. All the costs will be capitalized and added to basis in 2011.
Incidentally, if they start buying and flipping several houses a year, it could turn into a Schedule C activity, with SE taxes on the profits. The houses would become inventory, instead of investments.
And remember, you can find answers to all kinds of questions about flipping houses and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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