All Forum Posts by: Ryan Collins

I need help with a tax question - I bought a house with my father to flip at the end of last year. So, by government classification we were a general partnership at the time. We financed the house using a loan in our personal names because it allowed us to roll the financing of the renovations into the total loan at a low interest rate.

After closing on the property we moved all of our cash we put together into our new business bank account under our LLC. However, because of banking restrictions we could not change title of the home to the business name (typical with most bank loans). BUT we made the monthly debt service, utilities and maintenance payments from this business account.

The home has not sold yet and because our tax returns are not overly-complicated yet I am attempting to get this done by myself. I will hire a CPA this year after the flip sells but because we got screwed over by the original contractor in a BAD way money is an issue. Unfortunately right now things are a little too tight to pay a professional.

So my questions are as follows:

1.) The house did not sell in 2019. So my understanding is that we will be able to write off the money paid to the contractor and our holding costs against our ordinary income this year since this is a flow through entitiy and then pay taxes on the sale on the 2020 returns. Is this right? All of these costs should technically be considered COGS

2.) Or should all of this be capitalized (like construction in progress) and then accounted for on the 2020 return?

3.) We 1099'd the contractor what he was paid out of the draws back in January - was this correct?

4.) Should the LLC's COGS include the debt service, maintenance and utilities?

Btw - I'm a financial analyst/accountant I just don't have a CPA nor do I specialize in tax. But I do have some competency and have taken courses on some of this so I can at least keep up with the lingo.

Any help is appreciated! TIA

It's probably a little too early to tell now but I think it's a given there will be some impact. There's not enough information being provided to the public and the media is definitely pushing a fear based agenda. It will have an effect on the economy for sure. That's why they're already considering tax relief for travel & hospitality based industries. 

I was extremely conflicted about letting a family member that lives with us travel before doing research on it. Even then it's still scary and a risk to everyone. I doubt the majority of the public will look into it as heavy.

Sadly, I also was considering doing AirBnB right before this happened and I'll definitely be postponing that. Good luck and I hope you aren't affected.

Congrats on making it happen and taking action! Like you said that's the hardest part. I'm in a similar position. Just got my first flip to the market. Got a taste and I'm going after it now. Cleveland native living in TX now but looking in both places. Please post updates as you near completion.

Keep it going!

@Account Closed thank you all for the encouragement!

@Timothy Fizer thanks!

It’s been a long time coming. I think I joined BiggerPockets back in 2015 and I might’ve found out about the podcast around the same time. Even prior to that I’ve always had an interest in real estate because I’ve always seen it as the best means of financial freedom and getting out of the rat race. Now that I have a family I see it for the even greater tool it will be. There’s nothing like being able to reclaim your time and spend it with those most important to you.

I did my first “unofficial” flip as a live-in (in Cleveland, OH) when I bought it in 2014, and stayed there until 2017 before moving to Houston. Since moving here I’ve picked up a new job, new baby and a new primary residence. So my time has been a little occupied to say the least. Hence the reason for it being almost 4 years before being able to pull the trigger A LOT was happening every one of those years (not to mention getting engaged & married 2015-16). During that time I can’t lie I felt like a failure to my all time goal of RE investing. I had it set in my mind even prior to graduating college at 21 but for one reason or another I was constantly sidetracked. And there I was at a crossroads about to exit my 20’s and in my opinion still hadn’t taken serious action other than buying, renovating and selling my starter home.

FINALLY at the end of 2018 when things started to slow down for me I began to seriously entertain the idea of partnering with my father. We came to terms in May that year and agreed to a 70/30 (me/him) partnership. My father agreed to oversee the contractors and occasionally check in on the property since he still lives there. I handled everything else.

We found our first deal in late August 2019 in the Lee Harvard area of Cleveland. We bought it off of the MLS for $45k. It was a foreclosure that had been recently renovated in 2013/14 with a new roof and mostly required cosmetic updates. We intended for this to be a 30 to 60 day flip but we went with the wrong Contractor. And with the type of financing we used for this deal it was very hard to find another contractor willing to accept the lenders terms. It took about a month to find the replacement contractor, and then another month to get them on board because of the slow rep we were designated. I could complain about the terrible experience with this lender but that would be another book. Through it all we persevered and we have finally got our first flip to the market.

Here are the numbers:

Purchase Price - $45k

Renovation - $17.1k

Holding Costs (To Date) - $3.5k

List Price - $99.9k

15% Down Payment

Closing Costs & Points - $4.5k

At the end of the day this wasn’t the expected home run deal most newbie investors like me seek. We hurt ourselves and at the same time learned lessons you hear about but don’t fully understand until you go through them. I did not want that to happen but from an optimist perspective I’m glad we got burned now so it won’t happen again down the road. And even in the end albeit small money. Money is money and we won’t lose anything. This will be helpful as I attempt to scale my business interests in this market and others.

Biggest Lessons Learned:

1. 1. It’s probably best to keep business and family separate - the initial contractor was distant, distant family
2. 
   2. Make things clear with your contractor and establish ground rules up front
3. 3. The MLS is cool for when you sell. But be extremely conservative when buying from there.
4. 4. Don’t gamble on the neighborhood
5. 
   5. Make sure if you partner with anyone they are knowledgeable about the ins and outs of everything

Exit Strategies:

1. 1. Primarily looking to sell by traditional means right now - my father has decided this game isn’t his primary focus right now and would like to direct his attention to other goals. So this route will make it a little easier to sever ties. He’s still interested in investing with me but primarily only as a lender
2. 2. Owner financing
3. 
   3. Rent & Refi

Thanks for reading! I feel like this is a BIG deal for me to finally be able to post a testimonial lol. God bless & I will try to do my best to answer any questions/follow-up as quickly as possible

P.S. - I typed this in Apple Notepad so if it comes out funky when it posts please excuse the formatting 

Congratulations on the first one and thanks for being willing to share for those starting out with you like me. God bless

@Michael Plaks thanks for the great resources!