Two Flips Do I File Cap Gains Or Sch C?

Question

If I did two flips last year can I file both as capital gains or would I be considered a dealer and have to do a sch C? Both were held less than a year. Thanks

Natalie Kolodij · Answer

No Sam is wrong on this and keeps posting that incorrect information.

If your intent was to buy, renovate, and resell for profit the time held doesn't matter.

It's ordinary income tax subject to SE tax.

Linda Weygant · Answer

Agree with Natalie Kolodij - flipping is rarely capital gains, regardless of the holding period.  Pretty much the only way you can get it to capital gains is if you showed the intent to buy and hold for investment, but some extenuating circumstance caused you to flip instead.  Note that you may get away with this only once or twice.  If you continually have these "circumstances" that convert your rental to a flip before you even had a chance to rent it out, the IRS will likely reverse all your flips over the course of the current and prior years, in the event of an audit.The OP should get with a qualified CPA to discuss possibility of tax savings with an S-Corp, but this may not be a magic bullet depending on a whole host of other factors.

Michael Plaks · Answer

@Brad Warshaw

Three ideas were mentioned.

1. S-corp. May save you some money, but may save you zero. Depends on your numbers and on your regular job if you have one. If an S-corp can save you money - it will be in the FUTURE. It cannot be done for the past year. And it requires a special setup, probably with professional help.

2. Shifting income to family members. Has limited potential, requires low-income family members (kids or parents) to actually be involved in your business, proper setup, and also cannot be done retroactively for 2018.

3. Retirement plans. This is the only one where a limited opportunity for tax savings still exists for 2018. Once you put your money there, you canNOT touch it until retirement without severe tax consequences. So it only works for money that you do not need to spend today. (You can do real estate investments within retirement accounts, which is an entirely different conversation.)

Don't look for online advice on some magic loopholes that suddenly cut your taxes in half. They do not exist. What does exist is forward tax planning with professional help. Sorry about the harsh truth.

Steven Hamilton II · Answer

Natalie and Plaks covered this.

Its self employment income not capital gain. Those who are not qualified should not be relied upon.

I'm not very fond of S-Corps being used for everything. A great deal of analysis needs to be done before choosing an entity.

Michael Plaks · Answer

If by "this" you mean borrowing money from your retirement accounts for your flips - then it depends on the type of account. You can NOT borrow from an IRA for more than 60 days, and the 60 days "borrow" can only be done once a year. 99% of the people who try this end up failing to return the money within 60 days and paying heavy penalties.

This is NOT how retirement funds are supposed to be used and not what I was hinting at. I was talking about a more advanced concept of doing real estate deals INSIDE your retirement accounts. You cannot touch the profits from such deals, they stay inside the retirement account.

Again, you continue to expect some magical shortcuts which do not exist.

Steven Hamilton II · Answer

Don't forget that can also mean an understatement of income causing a six year statute to open if they used a 1031.

Steven Hamilton II · Answer

You're not qualified to give tax advice. Please do not do so.

What you stated above is 100% incorrect and will set you up for a lawsuit. Stop perpetuating incorrect information.

Brad Warshaw · Answer

@Michael Plaks no not expecting magical short cuts just asking questions. Thank you for your responses.

Jeff C. · Answer

The profit resulting from reselling a property you purchased for resale is not a capital gain and even if it was, short term capital gains are taxed at the rate of ordinary income anyhow.

Brad Warshaw · Answer

@sam If for some reason I hold for over a year can it be cap gains?

@Sam Shueh

Two Flips Do I File Cap Gains Or Sch C?

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