Flip Property Carryover Expenses

[Anonymous]

Hello, I am working to complete my small business return. I renovate real estate (classified as a dealer) and I bought a property in 2021 but am selling in 2022. I believe I need to capitalize the expenses I had in 2021 in order to lower my basis in 2022, but I am not sure where to do that. I know I cannot depreciate a flip house. Most advice I've found on here is for people filing a Schedule C but we are an LLC and file using Form 1065. The expenses I am referring to are repairs I did in 2021, insurance and property taxes. Thank you! 

[MinhT1]

As a dealer, the purcase price of a property and all the repairs, renovation, and other expenses related to a property to be resold are accounted for as Cost of Goods (Inventory if unsold at year end).

When in 2022 you sell the property, the total Cost of goods sold is deducted from your sale proceeds to give a gross profit reported on your form 1065. The amounts added to Cost of Goods sold will lower your gross profit in the year you sell the property.

[Anonymous]

Thank you. Do I report any of the expenses of 2021 in Section 263A or Form 1125A this year or do I wait and include them with next year (the year of sale)? If I try to add any of the 2021 expenses this year, they just show up as negative profits and very big losses on our K-1's, which I do not want. 

[PatriciaV]

No, none of your costs to prepare the property to sell are reported as expenses in any year. As Expert MinhT1 said, these expenditures are considered part of your inventory, which is an asset on your Balance Sheet, not an Expense on your Income Statement. You will receive the benefit from these expenditures when you sell your inventory.