can I write off flip expenses for a house selling in 2016?

Question

so I asked a question yesterday, but after sleeping on it I think this is the heart of my original question.

I flipped a house this year, but it won't sell til next year. Some of the money I used for renovations was allocated for my 4th quarter taxes of my single member llc. So now I don't have enough money to pay my taxes. Can I use some of the expenses for renovating the flip on my 2015 tax return to offset my income of my business? Then next year when the house sells just pay the extra at that time. It makes sense in my head.... The house was flipped in my name.

Daria B. · Answer

@Kevin Geracethought I'm far from doing an actual flip, I think after reading your post I need to consult my CPA and talk about how to structure a new LLC for the purpose of flipping. I buy and hold property not in an LLC and after reading up a little the subject, I think for the purpose of the flipping I would want an LLC to shield those costs into and keep separate from my normal operations of buying and holding property. Lots to discuss. Thanks for your post.

Kevin Gerace · Answer

OK thank you everyone for your input. I will call around today. And thank you Brandon Hall for yelling at me a bit. How nice it would be if I didn't have to pay 46% to the government. Pretty discouraging as a hard working business owner. I definitely won't use my tax money for renovations ever again though. I don't need this stress in my life.

Also this is my second year in business as a single member llc

Chris Soignier · Answer

I'm not a CPA, just a finance MBA w/ a lot of accounting hours and experience.   The correct way to do it in accrual accounting would be to capitalize the costs into the basis of the property, so you match the recognition of the costs w/ associated revenues.

There may be other ways to do it if you're on a cash basis, or want to be more aggressive in classifying expenses as maintenance, but I'd recommend hiring and consulting a CPA who understands your particular situation.     I learned several years ago that as adept as I thought I was at doing taxes, someone who practices taxation full-time provides a lot of value in minimizing my tax bill.

Dave Toelkes · Answer

@Kevin Gerace

The last time I read the rules on tax reporting for dealer dispositions, the rule was that all money spent on the property is included in the cost of goods sold on your schedule C (1040).  This includes the purchase price, rehab costs, as well as, holding costs such as utilities and upkeep.  You can not even place the property in your inventory until the year of sale, so, no expenses allowed at all for this year that are directly related to this property.  Since you bought the property this year and settlement won't take place until next year, your acquisition date for the property will be Jan 1, 2016.

Consult your own tax professional for more specific guidance.

Brandon Hall · Answer

@Kevin Gerace you must capitalize all direct and indirect costs if you are subject to Section 263A (UNICAP) rules. You are likely not, so you can write things off like holding costs (interest, taxes, etc) but everything else must be capitalized.

When you asked this the other day, I asked about your main business because that's where the last minute tax planning will have the most value. You are operating out of an LLC, how long have you owned this LLC? You can make a late S election and make sure you are utilizing all deductions possible to reduce your overall tax burden.

Lastly, in your last post you indicated that you were "told" the gov't takes 46% of your profits. You need a new CPA yesterday! Especially if this is coming as a surprise. Based on what you've told us, I feel that you've received bad or incomplete information. Start calling CPAs up and asking how they can help. There are two weeks left (last week in December is holiday) to have a CPA help you with your business. On top of that, many CPAs are gearing up for tax prep. Seriously, get on calendars and have a conversation with them by this Sunday.

Leigh C · Answer

@Kevin Gerace

You didn't flip it, you rehabbed it.    Once the property sells you flipped it.

To answer your question, my tax guy wouldn't allow me to do that, he explained the improvements made were added costs to my inventory expense.

You could maybe get away with maintenance type stuff, but you are walking a fine line.    Of course if you take the write off this year, next year is going to be even worse.Just my 2 cents, i'm not a CPA.

can I write off flip expenses for a house selling in 2016?

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