First Time House Flipper

[izkopaemoto]

I have 5-6 rental properties for years now, however in 2023 I decided to try my luck as a flipper. On 1/2/2023 I purchased a home and was working on it on weekends. The flip was completed, and I sold the house on 3/1/2024 (more than a year). I am now filing my 2023 taxes. Do I record the purchase and all my expenses for materials, contractors, etc. on my 2023 tax return (and then the sale on the 2024 tax return)? If so how and where do I record that on the 2023 tax return? I would need to record it on schedule C, correct? I will continue to continue to flip 1 house per year going forward.

[Vanessa A]

Yes, you will record the transaction on Schedule C, if you plan on being in the business of flipping houses.  The house is treated as inventory instead of an investment property which would qualify for Capital Gains.  So, unlike rental properties, you will need to pay Self Employment Taxes on your houses you flip when doing it as a business.  So you should be prepared to make the payment by April 15th. 

Although you will be filing a Schedule C, you still cannot deduct the costs of improvements on your Schedule C for 2023.  The cost of improvements will not be entered until you report the sale of the house.  The materials and labor will be part of your cost basis along with the improvements.  So in 2024, your improvements and purchase of the house will be reported along with the sale. 

[izkopaemoto]

Thank you for your reply, Vanessa. So how do I determine self employment tax? I officially did not pay myself a dime in 2023? 

[izkopaemoto]

PS: I do have a normal 9 to 5 job so that is the source of my main income. I did the flip in the weekends and did not pay myself in 2023.

[KrisD15]

As a schedule C Sole-Proprietorship, you are not allowed to pay yourself as an employee.

Self-Employment tax will be calculated for you based on your profit/income. It is the equivalent of FICA (Social Security Tax).

Since as a schedule C you pay both halves (when as a W-2 employee, your employer pays half) you get half of that as a credit, the software figures all that. 

You should also get the Qualified Business Income Deduction where 20% of the profit is non-taxed. Again, the program calculates that for you. 

You setup the business and enter expenses and income.