Accounting for house flippers

OP

Investor · Ashburn, VA · Member since 2020 · 140 posts · 145 votes

3y

@Russell Brazil do you use QB for your house flips?

I don't think that is correct about expensing. Google "house flip capitalize or expense" and see what comes up. I've also talked to multiple CPA's on this topic and they explained how you have to capitalize everything since the intent is to flip it. If you could expense these items then I should be able to take these deductions the moment the transaction occurs, but that's not the case. Every cost adds to my basis in the property and the profit or loss is realized only when the property is sold.

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

3y

Sorry, I miss read the post. I was reading it my head as a capital improvement, that would then get deprecated.

All costs are added up to the cost basis then when you sell the inventory, the difference will be your profit.

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OP

Investor · Ashburn, VA · Member since 2020 · 140 posts · 145 votes

3y

@Russell Brazil got it. So do you actively flip houses and if so, do you personally use QB for that? I'm just trying to see if I should give it another shot or look elsewhere.

Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes

3y

I use QuickBooks. For my fix and flips I use the class designation (each property is it's own class). On my balance sheet I have to assets: 1. The property and 2. Capital improvements (I call this my WIP, which stands for work in progress). I went into my accountant's office about 10 years ago and set it all up with her. It works great and we've never had any IRS issues. At the end of the tax year I just send her my P&L, balance sheet and settlement statements.

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Simon W.Business Member

Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 659 votes

3y

Quicksbook is really not meant for real estate but you can make it work. My clients are using QBO and I just have to track all financials for them.

I have clients that are mixed with Rental and Flips.

It all depends if you expect a flip to last longer than 1 year, chances are you going to put them all in Balance Sheet Items.

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OP

Investor · Ashburn, VA · Member since 2020 · 140 posts · 145 votes

3y

Quote from @Marty Boardman:

I use QuickBooks. For my fix and flips I use the class designation (each property is it's own class). On my balance sheet I have to assets: 1. The property and 2. Capital improvements (I call this my WIP, which stands for work in progress). I went into my accountant's office about 10 years ago and set it all up with her. It works great and we've never had any IRS issues. At the end of the tax year I just send her my P&L, balance sheet and settlement statements.

Got it, that makes perfect sense. So for the first item on the balance sheet you put the purchase price and then for the WIP item you add all purchase closing costs, reno/holding expenses, sale closing costs and then finally put the sale price as revenue?

Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes

3y

Quote from @William Harvey:

Quote from @Marty Boardman:

I use QuickBooks. For my fix and flips I use the class designation (each property is it's own class). On my balance sheet I have to assets: 1. The property and 2. Capital improvements (I call this my WIP, which stands for work in progress). I went into my accountant's office about 10 years ago and set it all up with her. It works great and we've never had any IRS issues. At the end of the tax year I just send her my P&L, balance sheet and settlement statements.

Got it, that makes perfect sense. So for the first item on the balance sheet you put the purchase price and then for the WIP item you add all purchase closing costs, reno/holding expenses, sale closing costs and then finally put the sale price as revenue?

Correct. As I pay contractors, for materials, etc., I add it in the check register and class is to the WIP account. When I sell the property I make a journal entry to remove it off the balance sheet (see photo attached).

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OP

Investor · Ashburn, VA · Member since 2020 · 140 posts · 145 votes

3y

@Marty Boardman very helpful. I am going to give QB another shot as this makes complete sense. Thanks for your input!

Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes

3y

Quote from @William Harvey:

@Marty Boardman very helpful. I am going to give QB another shot as this makes complete sense. Thanks for your input!

You're welcome!

Brett Tvenge

Flipper/Rehabber · Phoenix, AZ · Member since 2018 · 268 posts · 152 votes

3y

Quote from @William Harvey:

Hello BP community,

For house flippers doing consistent deals, what tool(s) do you use for accounting? I've tried QB (admittedly, didn't try for long) and it didn't seem to be a good fit. Seemed like QB would be good for a rental, but since with flips you have to capitalize every cost and everything is essentially on the balance sheet (versus the P&L) it didn't seem to work properly. Now, I manually export CC and bank statements into CSV files and then separate each transaction where it needs to go. I do at the end of each year and really dread it. It is super tedious and hurts my brain.

For instance, we bought/sold 5 flips last year so we have 5 "buckets" each transaction could fall in PLUS our general office expenses (Google ads, Propstream, DealSimple, etc.)

I manually go through every transaction to drop in the right "bucket" to figure out our profit for each deal and then I give to my CPA. Is there an easier way to do this? I've done this for years now and feel there has got to be a better way.

William, I have been wanting to make this same post. We do roughly 15 flips a year and do it exactly the way you do and it get's the accounting and taxes done but there has to be a better way. We make detailed P&L's for each property and then an LLC bucket with all relevant expenses.

My question for the forums is what do you do if you purchased a property in 2022 and ran the whole rehab in 2022 but it doesn't close until lets say January 4th.

Shiela R.

Investor · Boulder, CO · Member since 2017 · 304 posts · 347 votes

3y

@William Harvey and @Brett Tvenge. I'm not a CPA but I did get some excellent advise when starting out with flipping. I was told to create an S Corp and run all expenses through it and in QB the flips are divided by address into its own "class" as suggested by @Marty Boardman as well. The S Corp treats each property as inventory (think retail) and it works out to save me on short term gains.

I don't touch my own accounting anymore as I'm way better at other things. I would HIGHLY recommend getting a book keeper who is a REI or is an expert in REI. Then, once the book keeper gets everything into QB, send the accountants QB file to your CPA and it's mostly done. It's certainly a good exercise to learn what is what in QB. I've found some errors over the years, but mostly I am so relieved I don't have to think about accounting on the daily;)

2 Reply

OP

Investor · Ashburn, VA · Member since 2020 · 140 posts · 145 votes

3y

Quote from @Brett Tvenge:

Quote from @William Harvey:

Hello BP community,

For house flippers doing consistent deals, what tool(s) do you use for accounting? I've tried QB (admittedly, didn't try for long) and it didn't seem to be a good fit. Seemed like QB would be good for a rental, but since with flips you have to capitalize every cost and everything is essentially on the balance sheet (versus the P&L) it didn't seem to work properly. Now, I manually export CC and bank statements into CSV files and then separate each transaction where it needs to go. I do at the end of each year and really dread it. It is super tedious and hurts my brain.

For instance, we bought/sold 5 flips last year so we have 5 "buckets" each transaction could fall in PLUS our general office expenses (Google ads, Propstream, DealSimple, etc.)

I manually go through every transaction to drop in the right "bucket" to figure out our profit for each deal and then I give to my CPA. Is there an easier way to do this? I've done this for years now and feel there has got to be a better way.

William, I have been wanting to make this same post. We do roughly 15 flips a year and do it exactly the way you do and it get's the accounting and taxes done but there has to be a better way. We make detailed P&L's for each property and then an LLC bucket with all relevant expenses.

My question for the forums is what do you do if you purchased a property in 2022 and ran the whole rehab in 2022 but it doesn't close until lets say January 4th.

Glad to hear I'm not alone! As far as your question, you capitalize all expenses and whatever date the property is sold is when the profit or loss is realized.

For instance, in your example (btw, we have had multiple occasions where this happens in the past few years) if you paid $200,000 for the house, put $40,000 into reno, and then closing costs, commissions, etc. were $15,000 you would simply add all this up and that is your basis in the property. Then, let's say the property sells for $300,000. You'd subtract your basis from the sale price and you are left with a profit of $45,000 that is realized on whatever date the settlement occurs.

As far as I understand it, when the repairs, updates, holding costs, etc. take place have no bearing on anything. It just all gets added up and is deducted from the sale price when that occurs. In your example, January 4th would be when the profit is realized.

Would love for a CPA to chime in to confirm this or correct my understanding of how it works. If anyone knows a CPA on here please tag them!

OP

Investor · Ashburn, VA · Member since 2020 · 140 posts · 145 votes

3y

Quote from @Shiela R.:

@William Harvey and @Brett Tvenge. I'm not a CPA but I did get some excellent advise when starting out with flipping. I was told to create an S Corp and run all expenses through it and in QB the flips are divided by address into its own "class" as suggested by @Marty Boardman as well. The S Corp treats each property as inventory (think retail) and it works out to save me on short term gains.

I don't touch my own accounting anymore as I'm way better at other things. I would HIGHLY recommend getting a book keeper who is a REI or is an expert in REI. Then, once the book keeper gets everything into QB, send the accountants QB file to your CPA and it's mostly done. It's certainly a good exercise to learn what is what in QB. I've found some errors over the years, but mostly I am so relieved I don't have to think about accounting on the daily;)

Great insight! I agree, being taxed as an S Corp saves lots of money from not having to pay the full SE tax. I had a bookkeeper for a while but I couldn't get her to wrap her head around how flips are treated different than rentals so I ended up just doing myself. If you know a good bookkeeper that is familiar with accounting for flips, please let me know!

Simon W.Business Member

Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 659 votes

3y

@William Harvey I had to take on a client and fix a lot his QB because his bookkeeper was not focused on real estate and just classified a lot of things in the wrong place. It is very crucial to have someone who knows real estate, not just rentals to help maintain the books.

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Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

3y

QuickBooks - like most accounting/financial tools - is a Garbage In/Garbage Out scenario. You can use it for any business you can imagine, as long as you understand the accounting principals associated with that business and how it all works together.

In QuickBooks, you can set up projects for each flip and keep track of them on the balance sheet - where they belong - up until the moment of sale.

If you don't have a lot of accounting knowledge and are relying on QuickBooks to be intuitive, then you are going to be VERY disappointed. It may be a situation where you need to either learn more accounting or hire this task out.

No other software is going to help you as the same mistakes you made in QuickBooks will be the same mistakes you make in any other software.

3 Reply

Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

3y

Quickbooks is an accounting software and can be used for any business within any industry.
(However, the software is geared towards smaller companies)(There are specialized softwares that larger companies use).

Quickbooks can handle the accounting for a small business who does flips.

In my opinion, you likely need to take a class on QuickBooks to properly and efficiently use the software.
There are likely some schools nearby that will teach you quickbooks.

The alternative is to out-source it to someone who is focused on the real estate accounting space.

Best of luck.

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Tim DelaneyPro Member

Buffalo, NY · Member since 2018 · 790 posts · 530 votes

3y

@Marty Boardman thanks for sharing - just to be clear you put all your expenses related to the house under one capital improvement account t (Wip) and do not bother breaking them down into categories like kitchen and flooring and paint, etc?

Also, is there anyway you would be willing to share a sample screenshot of your journal entry for purchasing a home and for the sale?

Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes

3y

That is correct. I do not break them down into categories, however I explain what work was done in the memo line so if I want to know later I can print the report and add to an Excel spreadsheet.

Attached are screenshots of a sold property. There are 2 journal entries for this. I also included the P&L so you can see how it looks once I take the house off the books.

Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes

3y

Quote from @Tim Delaney:

@Marty Boardman thanks for sharing - just to be clear you put all your expenses related to the house under one capital improvement account t (Wip) and do not bother breaking them down into categories like kitchen and flooring and paint, etc?

Also, is there anyway you would be willing to share a sample screenshot of your journal entry for purchasing a home and for the sale?

Sorry Tim I should have answered your question and posted the screen shots by quoting! My answer (and other screenshots are in the thread).

Here's the screen shot of the journal entry when I put the house on the ledger.

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Tim DelaneyPro Member

Buffalo, NY · Member since 2018 · 790 posts · 530 votes

3y

@Marty Boardman thank you for sharing!

Antonette El Baz

Accountant · Member since 2023 · 48 posts · 30 votes

3y

Ever thought about outsourcing your bookkeeping service to manage your real estate business's finances? I have experience working with clients who use QuickBooks Online (QBO) and have a mix of rental properties and flips. I understand the unique accounting needs of real estate businesses and can help you track all your financials effectively.

I am familiar with the best practices for classifying flips in QBO, whether they should be treated as short-term or long-term investments. I can also set up "classes" in QBO to track each property separately. Additionally, I am well-versed in the tax benefits of using an S Corp to treat each property as inventory, which can save you on short-term gains.

Don't waste your valuable time on bookkeeping when you could be focusing on other important aspects of your business. I highly recommend outsourcing your bookkeeping to a professional who is an expert in real estate investing. Once your books are in order, then you can send your file to your CPA for ease of filing taxes. It's also a great opportunity for you to learn about QuickBooks and understand how it can benefit your business.

Markus Shobe

Accountant · Indianapolis, IN · Member since 2019 · 247 posts · 134 votes

3y

This is why it is so important to hire a bookkeeper that specializes in real estate. It may cost more but the headaches it saves is more than worth the extra cost. Every transaction that you do with a flip will go on the balance sheet and will be expensed to cost of goods sold once you sell.

Peggy Pastore

Member since 2023 · 1 post · 0 votes

3y

William, not sure if you are still seeking an answer to your question, but I thought I would reply anyway. I am a CPA with a small virtual bookkeeping firm specializing in real estate accounting for real estate investors. And I'm also a investor. I say this not because I am looking for clients but to let you know that I have actual knowledge in this area.

If you are just looking for very simple reports for your projects, then QB Online is sufficient. The information you get from QBO, in my opinion, is insufficient to support sound decision making. And at the subscription price level ($85/mo for Pro and $200/mo for Advanced) I don't find it very cost effective. I try to keep my investor clients and contractors on the desktop version where I can produce Job Cost reports at the push of a button for my clients. The reports are tailored to the client needs and can be as detailed as required. All project costs are directed to WIP and do not show on the P&L until the project is sold, as it should be. QuickBooks Desktop handles this like a charm. Hope this helps.

Steve Kouromichelakis

Member since 2022 · 1 post · 0 votes

2y

@ Marty

@Marty Boardman @Tim DelaneyThanks gents very informative info. Marty for some reason I can see the screenshots on the here, can you email them if possible? Its actually asking me to right click and download them but they are empty. undefined