Profits and losses from flipping

[Victor Chan]

I have a question on the tax issues when it comes to flipping. If one buys and sells homes using their personal names, and say there is a profit of $50K on house 1, and a loss of $20K on house 2, can we offset them and just  pay tax on the net of $30K? Thanks!

[Brandon Hall]

Originally posted by @Victor Chan:

I have a question on the tax issues when it comes to flipping. If one buys and sells homes using their personal names, and say there is a profit of $50K on house 1, and a loss of $20K on house 2, can we offset them and just  pay tax on the net of $30K? Thanks!

Yes this is correct. Technically, the majority of expenses you incur through your flipping business will be capitalized as "Inventory" and when you sell the property, you reverse your "Inventory" and expense "Cost of Goods Sold." if your Cost of Goods Sold exceeds the money you receive, you have a loss.

Example (Dr = Debit, Cr = Credit):

Purchase the property and rehab:
Dr: Inventory - Acquisition Costs - $20,000
Dr: Inventory - Rehab Costs - $80,000
Cr: Cash (or loan) - $100,000

Selling the property at a gain:
Dr: Cash - $120,000
Dr: Cost of Goods Sold - $100,000
Cr: Inventory - $100,000
Cr: Revenue (Sales) - $120,000

Selling the property at a loss:
Dr: Cash - $90,000
Dr: Cost of Goods Sold - $100,000
Cr: Inventory - $100,000
Cr: Revenue (Sales) - $90,000

In the third journal entry, your Cost of Goods Sold (an expense) exceeds your revenue which will translate to a net loss on your P&L.