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

[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 

[Jason Malabute]

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.