Filing Taxes as a Flipper?

Question

I have ran across individuals who flip houses and am curious as to what techniques they use for tax filings when they are not incorporated under an LLC or S corporation? When an individual purchases a property, how do they track and account for expenses required to upgrade property and such that capital gains reflect this?

Cara Powers · Answer

An individual can use any method they like to account for capitalized and immediately expenses expenditures (including the shoe box method).

An individual who infrequent and sporadic flips, would report the expenses (if any) on Schedule C and the disposition of the asset on Schedule D (capitalized costs add to basis and reduce the capital gain).An individual who is flipping houses as a business reports their income and expenses on Schedule C. Because the IRS classifies individuals who actively purchase and remodel real estate for profit on a continuing basis dealers rather than investors, capitalized costs are transferred to Cost of Goods Sold when the property is sold. Income is also subject to self-employment tax.

David M. · Answer

@James McGovern

To tag onto @Cara Powers post...

Remeber single member LLC’s are disregarded entities so they file like sole proprietor...

For flipping, mainly the expenses go towards your cost basis.  That’s how you figure your taxable profit (sales price - cost basis).  As mentioned, flip profits are considered active income since you are generally considered selling inventory as opposed to investing.  So, while it might be nice to potentially earned a good chunk of cash on a deal, you have “maximum” taxes applied.

Hope this helps.  Good luck.