capital expenses or deduction???

Question

I am a real estate professional. (not passive activity).. I file jointly with my husband who is a doctor and has high income (500k/yr). I have 3 LLC's for mostly flipping properties. I have 2 rentals and 5 houses for flipping in each of my 3 LLC's .. In getting these properties in livable condition ready for sale, do these repair expenses (labor, materials, tax, and insurance) have to be capitalized or can be deducted in same year? I know that improvement has to be capitalized and repairs have to be deducted. most of the work done are repairs more then improvements.

What schedule do I need to use , schedule C or E for each LLC ? I am finding alot of conflicting information on these issues. Please help!

What schedule do I need to use , schedule C or E for each LLC ?  I am finding alot of conflicting information on these issues. Please help!

Steven Hamilton II · Answer

If you are flipping houses they are inventory and THEN become cost of goods sold once sold. They only thing you can deduct current year is the property taxes.

Wayne Brooks · Answer

If they are flips, not long term investments, the improvements/expenses are simply deducted from the net proceeds at the time of sale, as additional "cost of goods" , to determine profit. As far as I know, they aren't deductible expenses "as you go along".

@Steven Hamilton II??

J Scott · Answer

Wayne is correct.  When flipping, the houses are inventory, and all labor and materials are considered Cost of Goods Sold (COGS).

As for other expenses (insurance, taxes, etc), I *believe* these can be deducted in the year in which they occur, but to make things simple, I typically allocate all flip expenses to COGS, in which case they are applied against income in the year in which the inventory is sold.

capital expenses or deduction???

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