Discussion:House Flipping - Business or Investment?

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Discussion Forum Index --> Tax Questions --> House Flipping - Business or Investment?

JeffM (talk|edits) said:

9 March 2007
By house flipping I mean buying a house, making repairs, painting the walls, replacing some carpet, etc, and then putting the house on the market. To clarify further, the client has a full-time job and is doing this in his spare time.

Would you file that as a Schedule C business or as a Schedule D gain? If a person bought and sold several houses during the year, I would go with Schedule C, but what if there has been only one house so far (that has not actually been sold yet) and the client may or may not do this again?

Deback (talk|edits) said:

March 9, 2007
Sch D

Lel4110 (talk|edits) said:

10 March 2007
I just had this issue with a client. I think the real key is intent: does the taxpayer intend to roll the property(s) to make a profit (business), or hold them with the hope that over time they will increase in value (investment)? You might be able to justify one property here and there on a Sch D, but I believe it is a red flag for the IRS to see several properties sold each year reported on a Sch D instead of a Sch C. I laid both sides out for my client, because much of the basis for which direction to go here rests in how conservative you and your client are - how comfortable are you with taking an aggressive stance?

KENDRICK (talk|edits) said:

10 March 2007
If client is getting into this business, Schedule C. If client is going to do one of these every couple of years, I would say Schedule D.

Of course the absolute correct way is Schedule C if his intent is to flip . . .

Riley2 (talk|edits) said:

10 March 2007
In one of the earlier "flipping" cases, the Tax Court ruled that an airline captain could not use the fact that he had a full time job to prove that he did not have a trade or business. The Tax Court has also rejected to what the court refers to as the "one bite" defense. In other words, the Tax Court doesn't believe that you can be a little bit of a flipper just because you flip only once -- it is all or nothing.

Wwtaxes (talk|edits) said:

29 March 2007
I've been reading through various discussions concerning flipping houses, and I can't help but think that I'm overlooking something.

If a TP starts an LLC (SM, taxed as Sole Prop) with the intent of purchasing and rehab'ing houses, but the holding period is across 2 or more tax years, what dictates what should be capitalized and what should be expensed? Some of the discussions indicate that UNICAP applies, some seem to suggest that it doesn't. Some say to capitalize improvements and expense items like taxes and interest. In the absence of a crystal ball, I am guessing that the TP will continue to flip houses, one at a time. Of course, he could decide this just isn't for him. I'm thinking that I'd like to capitalize as much as possible to offset the gain when the property sells. This is his first property, so there is no income, and I would rather delay the expenses to reduce the gain when he sells.

CrowJD (talk|edits) said:

29 March 2007
On fix and flip: Standard case: Gartrell & Gartrell 619 F2d 1150 (1980). [A lot of times your county courthouse will have a law library the public can use]. Other cases are basically all over the place: M.W. Enslin TC Memo 1982-430 (1982) a case IRS will likely pull out if they are in a bad mood; RL Hamilton TC Memo 1973-93 (1973) more positive for TP treating as investment. There is a code section that addresses developers: IRC 1237.

Bigger picture: the speculative real estate game ended about 3 weeks ago.

Death&Taxes (talk|edits) said:

29 March 2007
We've got a couple of waterfront ones down here, asking 2.8 million, that have been vacant since being finished last year. If another summer goes by, these people won't be flippers but rather sinkers.

CrowJD (talk|edits) said:

29 March 2007
Yup, D&T, and then the folks find out just what a personal guarantee is; and the fact that the new BR law ain't as generous as it once was.

Wwtaxes (talk|edits) said:

29 March 2007
Thanks for the references. I will try to look into the cases. However, I don't think that IRC 1237 would apply since that is for subdividing RE and developers, neither of which apply here. What was different with this TP than the other discussions I've read is that he formally forned an LLC to do this work, so it is a business.

As for the housing market, I understand what you're saying D&T, but there is an alternative view that says the growing foreclosure scene is good for buying houses in a distressed situation and still being able to sell in this type of market. I fear we will be seeing more house flippers, not less.

Larry0434 (talk|edits) said:

29 March 2007
I suggest your client seek a tax professional experienced in working with real estate issues. The difference betweeen an investor and dealer is a very complicated issue. The information you provided is not sufficient to give any real advise.

Riley2 (talk|edits) said:

20 April 2007
Unicap rules apply to flippers. See Sec. 263A(b)(2)(A).
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