Is a LLC that did only one house flipping considered dealer or investor?

[EllenHarr]

My husband and I set up an LLC and purchased 3 houses in 2019. We intended to fix them up and re-sell them for profit. However, due to pandemic we couldn't finish the projects. The 3 houses were never rented. In 2022, we sold one of the houses for a loss. How do we report the acquisition costs, renovation costs and the real property taxes and utility costs for these 3 properties in the past 3 years? Is the LLC considered as real estate dealer or investor when we file taxes? 

If considered as a dealer, we only sold one house in 3 years for a loss, do we need to pay self employment tax? How do we input the inventory? There are no options in TurboTax for us to separate costs for each property. Do we sum up all of costs for 3 houses?

If considered as investor, the loss is capital loss and we can only claim $3000 per year, right? In TurboTax, there is only one option "Rental Property" that we can put in the property information. But they are not rental properties and there is no place for me to input the renovation costs. How should we do it? Thanks.

We use TurboTax Business version.

[Mike9241]

I would consider you an investor.   you do not report inventory on your return you only report the sale of the one house you sold and its related costs on form 8949 not schedule C. the costs for the other two houses can not be deducted until sold or otherwise disposed of.  in addition, you can not include the costs of real estate taxes, any financing costs,  and other carrying charges (insurance, HOA fees and other maintenance expenses ) for the years 2019-2021 becuse you failed to make the elction under IRC 266 to capitalize them. also if you are filing 2022 late the elction can not be made for 2022 either. 

others may offer a different viewpoint. 

[EllenHarr]

Hi Mike,

Thank you for your answer. Do we report the sale under "Investment Income" or "Other Income"? We can't deduct property tax, mortgage interest and the carrying costs? It makes us even loss more money. It's quite sad.

[AmeliesUncle]

---

@EllenHarr wrote:

set up an LLC and purchased 3 houses in 2019. We intended to fix them up and re-sell them for profit.

do we need to pay self employment tax?

How do we input the inventory? There are no options in TurboTax for us to separate costs for each property. Do we sum up all of costs for 3 houses?

---

I view it differently than Mike.  Your intent was to fix up and sell three houses.  In my opinion, that is a business. of flipping houses.  Setting up a LLC and filing a Partnership return seems to support that idea.

The pandemic is mostly over (for the most part) - is there a reason why you can't fix them up and sell them now?

You would owe self employment tax on the profit.  If there isn't a profit, there is no self employment tax.

For inventory, you report the the starting cost (all three houses) and the ending cost (the two remaining houses).  Then effectively the cost of the one sold house ends up being a deduction against the income.

[EllenHarr]

@AmeliesUncle 

Thank you for your input. When I calculate the inventory value, do I include all expenses and carrying costs, such as property tax, mortgage loan interest and renovation costs? Thanks.