Hi, so I bought a flip property (in Philadelphia, PA) for 169,000 in the summer of 2016 with the plans of selling in the year 2017 of course. In September 2016 I started the rehab process. We have put in about 100,000 already in by the summer of 2017. However, due to many unforeseen circumstances, money and the laborers who started but didn't do good work and it had to be done over ( etc.) the house is not sold yet even as of today. At the end of the last year, we decided just to try to sell it to those cash buyers as-is, had some offers but we didn't like the offers. This winter has caused some pipes to burst so now we had to fix that and the as-is offers maybe will be less than before.
So my question is how should I file my 2017 taxes. I didn't include the purchase of the house in 2016 taxes because I thought I would just do the whole for the purchase and sell on the 2017 taxes. Don't know if I messed up by doing that way. But Please help!!
You have only the losses of the work you put in that is not a "major improvement" to the house your losses or profit would be fully reported when the house is sold. But consult with a tax professional as there will never be enough detail and nuance in an internet post.
Your only deductions before you sell would be carrying type costs.....property taxes, insurance, utilities, insurance, etc. All your improvements and repairs get deducted from your sales price on the back end.
@Alisa Keith - like they’ve said, talk to your accountant. You can put in no income for your ‘rental’ and deduct repairs immediately and you capitalize improvements.
I’m in your market, PM me if you want me to do a walkthrough. You will only benefit by getting it on mls even if you can’t finish it to financeable standards.
So 2017, schedule e
Insurance, taxes, utilities
Capitalize major improvements into the house price / basis.
2018 sell property -
Pay depreciation recapture
Pay tax on gain (get benefit on loss) between sale price - purchase price - capitalized improvements (plus depreciation recapture x 25% or so)
You did not mess anything up, @Alisa Keith .
The only thing I agree with in the previous answers is "talk to a tax professional" :)
The property was never placed in service as a rental, so you cannot deduct holding costs and depreciation in 2017.
Everything specifically related to the property (repairs, taxes, insurance, utilities, interest, etc) is stacked up, set aside and eventually deducted against the sales price. Nothing is deducted in 2016 or 2017. The official term is "capitalized."
The only things you can deduct in 2017 are overhead costs of running the business: education, technology, memberships, driving and whatnot. All expenses not directly tied to the property. Travel to the property is grey area.
I do recommend you deduct these expenses in 2017 even if small. It's important to avoid treating of the sale of your property as a capital loss. Deducting interim business expenses is an important part in accomplishing this goal.
From an insurance standpoint I would review your coverage. If the house is not being worked on there may be Vacancy Clauses in your property coverage that could kick in. There are specific policies for Vacant properties that may provide more coverage for the building than a regular policy once the vacancy provisions kick in. Check with your agent.
Ok, thank you so much, everyone, for your feedback. @Natalie Schanne I will PM for more info on what is probably my best option to sell the house. Thank you as well for your information. I am pursuing my Bachelors in Accounting, however, I still get confused when it comes to expensing and capitalizing. @Michael Plaks
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