Question on renovation cost deduction from profits on a flip for taxes

Member since 2025 · 5 posts · 1 vote

Apologies in advance if I'm wording this incorrectly -

I had an investment property from 2021 to 2024 we were doing renovations on the whole time. We sold in April 2024 at a loss due to the time holding, having to refinance the bridge loan, and rehab costs. My tax person is saying we can only write off renovations that were done in 2024 (even though we didn't write off the previous years).

He says because of the appreciation from 2021 to what we sold it for in 2024 the capital gains tax is going to be close to $50k were going to have to pay, even though we took a loss on the house.

Does anyone know if this sounds correct? The house was in Palm Springs, CA

Thanks in advance

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Jason MalabuteBusiness Member

Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 903 votes

Hi Sophie — since this was a fix-and-flip, it’s treated as inventory, not an investment property, so you don’t depreciate the renovation costs. Instead, all your rehab, holding, and financing costs from 2021 to 2024 should be added to your cost basis and deducted when the property sells. The entire profit (or loss) is taxed as ordinary income, not capital gains. If you sold at a loss after including all those expenses, there shouldn’t be a big tax bill. Sounds like your tax person may be misunderstanding how flips are taxed.

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Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 903 votes
1y
Hi Sophie — since this was a fix-and-flip, it’s treated as inventory, not an investment property, so you don’t depreciate the renovation costs. Instead, all your rehab, holding, and financing costs from 2021 to 2024 should be added to your cost basis and deducted when the property sells. The entire profit (or loss) is taxed as ordinary income, not capital gains. If you sold at a loss after including all those expenses, there shouldn’t be a big tax bill. Sounds like your tax person may be misunderstanding how flips are taxed.
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Sophie Knight
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Member since 2025 · 5 posts · 1 vote
1y
That makes much more sense, thank you so much for letting me know! Do you do real estate taxes yourself?
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
1y
Quote from @Sophie Knight:

Apologies in advance if I'm wording this incorrectly -
I had an investment property from 2021 to 2024 we were doing renovations on the whole time. We sold in April 2024 at a loss due to the time holding, having to refinance the bridge loan, and rehab costs. My tax person is saying we can only write off renovations that were done in 2024 (even though we didn't write off the previous years).
He says because of the appreciation from 2021 to what we sold it for in 2024 the capital gains tax is going to be close to $50k were going to have to pay, even though we took a loss on the house.
Does anyone know if this sounds correct? The house was in Palm Springs, CA
Thanks in advance

Before you rush to a conclusion, we need to know more. What my colleague @Jason Malabute said is correct, but it assumed that taxes were filed correctly in 2021, 2022 and 2023. Correct filing would be to have NO deductions for renovation in 2021-2023. Then all of them count in 2024.
However, what have possibly happened is that your accountant deducted your renovation costs in 2021, 2022 and 2023 as they were incurred. If this is what they did, then counting them all for 2024 would be double-dipping since you already took advantage of these deductions in 2021-23. You would have to either record a capital gain in 2024 or redo 2021-23 to remove those improper deductions - which is costlier and more complicated.
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Sophie Knight
OP
Member since 2025 · 5 posts · 1 vote
1y
We did not right off any renovation costs prior to the sale of the house. Only the mortgage interest and property taxes.
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- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  1y
  Quote from @Sophie Knight:
  
  We did not right off any renovation costs prior to the sale of the house. Only the mortgage interest and property taxes.
  
  There is a possibility of misunderstanding between you two, but if what you shared is exactly what he said, then it sounds wrong.
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Sophie Knight
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Member since 2025 · 5 posts · 1 vote
1y
And what about holding costs, can those be deducted from the profits? Even though we did right off mortgage interest which was the mortgage payments since it was a fix and flip loan?
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- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  1y
  Quote from @Sophie Knight:
  
  And what about holding costs, can those be deducted from the profits? Even though we did right off mortgage interest which was the mortgage payments since it was a fix and flip loan?
  
  All property-specific costs, including holding costs, are deductible against the sales price. As long as they have not been deducted already. You mentioned that you already deducted interest and property taxes. You cannot double-dip on those.
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Sophie Knight
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Member since 2025 · 5 posts · 1 vote
1y
Thank you. Does a refinance during it matter at all? Our original fix and flip loan matured and actually went into default, we refinaced out right before they forclosed
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Mike Klarman
Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes
1y
So, there is a cost basis to these projects. All the costs get to be deducted from the gross. That's why it important to keep good books on all projects. Does refinancing matter? That depends, did you get any cash out besides your initial investment? Refi doesn't matter in terms of of you leave money in, what would you owe on? If you have 20k in a house on a bridge loan and at the refi you get 50k back. Your 20k and 30k more, then yes you have a tax liability for that 30k.
If you do things out of a straight LLC you will pay 35% - 40% in inclusive taxes. If you do it out of an S-Corp and become a W2 paycheck employee of the company then you can do it at like 20% - 25% tax, or whatever your federal tax rate falls under.
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- Natalie KolodijBusiness Member
  Moderator
  Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
  1y
  Quote from @Mike Klarman:
  
  So, there is a cost basis to these projects. All the costs get to be deducted from the gross. That's why it important to keep good books on all projects. Does refinancing matter? That depends, did you get any cash out besides your initial investment? Refi doesn't matter in terms of of you leave money in, what would you owe on? If you have 20k in a house on a bridge loan and at the refi you get 50k back. Your 20k and 30k more, then yes you have a tax liability for that 30k.
  If you do things out of a straight LLC you will pay 35% - 40% in inclusive taxes. If you do it out of an S-Corp and become a W2 paycheck employee of the company then you can do it at like 20% - 25% tax, or whatever your federal tax rate falls under.
  Taking on debt isn't a taxable event.
  
  If you have a loan for $20k and you a Cash out refinance for $50k. There's no taxable event.
  
  The taxable event is the sale of the actual asset and based on it's basis-unrelated to the debt amount.
  
  The interest on the new $30k may not be deductible, but that's a different situation.
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Mike Klarman
Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes
1y
So, if I'm in for 20k on a property and at a refinance I can pull out 100k let's say. The investor would not owe any earnings tax on that 80k margin, just it would cancel any cost deductions?
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- Natalie KolodijBusiness Member
  Moderator
  Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
  1y
  Quote from @Mike Klarman:
  
  So, if I'm in for 20k on a property and at a refinance I can pull out 100k let's say. The investor would not owe any earnings tax on that 80k margin, just it would cancel any cost deductions?
  
  Yes.
  
  If your pay $20k for something worth much more
  
  And a bank gives you $100k against the asset
  
  You just now have a loan for $100k.
  
  That's not taxable. You didn't earn any money- you have to pay it back to somene.
  
  If you sell it 5 years later for $125k you would have to pay the bank back say $85k left on your loan balance.
  
  So when you sold it your gain would be $125-20 = $105,000 taxable gain when sold
  
  But the cash you'd get when you sold it would only be $40,000
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