Flipping but won't be done until next calendar year, tax advise?

Question

Hi,

My first post!

I have a house that I am doing a full-time live-in flip on.  I am complete rehabbing the front unit, and then adding on/converting garage into 2 bedroom house.

Problem is, I won't be done until next year.  I file a schedule E with itemized depreciation of improvements.  Can I claim 2019 expenses in 2020? Otherwise, all of those deductions will be lost?

Eamonn McElroy · Answer

@Philip Johnson

I'm not familiar with TurboTax so I won't be able to help you there.

I'm a CPA so I use professional, commercial level software.

"I would just claim the 2019 improvements in 2020"

Just to be clear, treatment would depend on the facts and circumstances surrounding the cost.  Most likely the costs would be capitalized and depreciated once the rental is put into service, however this is a general rule and not always true for every expenditure.

If you find you're not comfortable with a DIY approach I recommend interviewing a few CPAs and EAs.

Eamonn McElroy · Answer

@Philip Johnson

The disconnect is that you called this a "live-in flip" above.  A live-in flip is thought of as a fixer upper you buy that you renovate while living there in order to use your $250k / $500k principal residence exclusion after 2 or more years.

You're merely living there while you renovate and plan to turn the property into a rental after moving out.

All expenses are personal in nature while you live there.  All improvements should be capitalized and depreciated once put in service as a rental, at the lesser of basis or FMV.  Nothing should be going on schedule E while it's your principal residence.

Ashish Acharya · Answer

There are both good and bad new.

Unfortunately, if you are living in the property, it’s a personal asset and all the expenses are personal In nature. There is no depreciation as well. In general there is no depreciation on flip peopery even if you didn’t live in it.

All the improvements will be added to the basis of your peopery and when you sell it, your gain will be lower.

Unlike non live-in flip, small repairs are not capitalized and the expenses are personal in nature. There is an expectation to that rule, so I recommend grouping small repairs with big projects so that you get to capitalize repairs as well.

Good news is that, if you live in the property for 2 years, there will be no tax on the gain.

Also there is no schedule E reporting. When you sell it, it will be reported in your personal schedule D as sale of a capital asset.

Philip Johnson · Answer

Thanks this is extremely helpful! I use turbo tax, I would just claim the 2019 improvements in 2020? Any special way to do that in turbo tax ?

Philip Johnson · Answer

Sorry I needed to clarify! It's being converted to a  RENTAL property, this is my #5 rental property. If it's a rental can I carry over the expenses to the next year?

Flipping but won't be done until next calendar year, tax advise?

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