Today TaxMama hears from Mark in Columbus, Ohio, who has this scenario: “A taxpayer buys 3 homes in a year. None are personal residences. The first is rented. The second is sold for a profit. The third is on the market “for sale”. The taxpayer is interested in continuing to buy and sell and rent residential homes. However, this is not the taxpayers primary business activity. The primary activity is “store owner” not related at all to real estate. How would you report income from the sale of the home? Schedule D as investment income? Schedule C as ordinary income?”
Well Mark,
I’m not sure at what point you start becoming a dealer of real estate. But it probably starts at something like 10 properties a year. At that point, yes, you’ll end up reporting the transactions on Schedule, and paying the self-employment taxes on the profits. Until then….
If any of the homes was personal residence which was rented until a buyer could be found, it can be reported on Schedule D, and you might be able to take advantage of the personal residence exclusion.
Otherwise, if it was strictly rental property, report the sale on Form 4797 – with the depreciation and other costs taken into account.
https://www.irs.gov/pub/irs-pdf/f4797.pdf
Real estate held strictly for investment – to buy, fix up and flip, would get reported on Schedule D. After all, it is investment property – regardless of whether it’s held short-term or long term. .
https://www.irs.gov/pub/irs-pdf/f1040sd.pdf
Of course, the best way to invest in individual houses, like you’re describing is buy it as a residence. Live in it for two years, fixing it up while you’re there. Then selling it and sheltering $250,000 of the profits from taxes altogether. (or $500,000, if you’re married or have a partner living with you.)
Naturally, if you’ve got the money to play with all this property, you also have the money to work closely with your own TaxPro. You’d be doing yourself a great disservice if you don’t.
And remember, you’ll find answers to lots of real estate and other tax information, free. Where? At TaxMama.com
- Ask TaxMama :: Where taxes are fun and answers are free
- IRS Form 4797 :: Sales of Real Estate and Other Business Assets
- IRS Schedule D :: Capital Gains
- Rich Dad’s Advisors®: :: The ABC’s of Real Estate Investing : The Secrets of Finding Hidden Profits Most Investors Miss (
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