We have purchased a house to flip. We are in the process of renovating it and I'm not sure where I enter the cost of the house and the expenses. Do we enter this under personal or under my husband's sole proprietor business? I have looked and looked and can not figure this out. Can someone please help?!
First, you will need to determine if you are a real estate investor or a real estate dealer.
Generally speaking, real estate investors purchase real estate with the intention of holding their properties and gaining a financial return; real estate dealers buy and sell real estate as part of their everyday business. It all comes down to the intent behind the property purchase.
Even if you originally purchased the property to hold, but ended up selling it sooner, it does not mean that you are a dealer.
If you are a real estate investor, then the "flip" will be reported as a sale of an investment asset.
The costs of obtaining, building, or any payment to contractors will be added to the cost basis of the house and used against the sales price to reduce capital gain on the sale.
- Open your return in TurboTax.
- In the search box, search for sold second home (use this exact phrase) and then click the "Jump to" link in the search results.
- Answer Yes on the Did You Sell Any Investments in 2010? screen.
- If you land on the Here's the investment sales info we have so far screen, click Add More Sales.
- Answer No to the 1099-B question.
- On the next screen, select Second Home (choose this also for inherited homes) or Land. Click Continue.
- Follow the on-screen instructions to completion.
If you are a real estate dealer, then you will report the "flip" on Schedule C.
The sales price will be your gross income (general income in TurboTax) and basis will be your cost of goods sold. This income will be subject not only to income taxes at ordinary income tax rates, but also self-employment taxes. You will also need to upgrade your TurboTax software to Home & Business.
To enter this as business income:.
- Sign in to TurboTax.
- Type sch c in the search/find bar and click search/find.
- Click on Jump to sch c.
- Click on start/edit or Add Another Business.
- At the Your XXX Business screen:
- To enter your income, scroll down to Business Income. Click Start/Update. Click Start/Update next to General Income.
- To enter your business expenses, scroll down to Business Expenses, Other Common Business Expenses. Click Start/Edit.
- Continue with the onscreen interview.
- Is the money I made from a home sale taxable?
- Where do I enter Form 1099-S?
- I sold my rental property. How do I report that?
If you are a casual or occasional flipper, you don't list anything until you sell. At that time, you report the asset (the house), the adjusted cost basis (the price you paid plus whatever you paid for improvements), the selling price, and your taxable income is difference between the cost basis and selling price. If you bought the home in 2020 but did not sell it before 12/31/2020, you don't report the purchase or sale. You may be able to deduct certain of your carrying costs, as described below.
For the adjusted cost basis, you can include materials you purchased and labor you paid for but you don't get an adjustment for the value of your own time and labor.
You would not enter the expenses on a schedule C business unless you were in the regular business of buying, repairing, and flipping houses as an "ongoing trade or business"
For your carrying costs, you can deduct property taxes on any property you own, up to the $10,000 cap on state and local taxes. You can deduct mortgage interest on your main home and one second home, and your flip can be your second home for this deduction if you choose. You can't deduct utilities, insurance, or other carrying costs.
You may be able to capitalize your carrying costs, but this is unclear. Prior to the 2018 tax reform law, carrying expenses on investment property (such as utilities and insurance) could be deducted as a miscellaneous itemized deduction subject to the 2% rule. Or, you had the option to capitalize the expenses. That means you add the expenses to the adjusted cost basis. Capitalizing your carrying costs requires filing your tax return on paper and attaching a written statement. If you bought the house in 2020 and plan to flip it in 2021, you still must attach the capitalizing statement for 2020 costs to your 2020 return. See this answer for more,
However, the law says you can only choose to capitalize costs that are deductible, instead of deducting them. After tax reform, these costs aren't deductible, and the IRS has not issued a final ruling as to whether you can still capitalize such costs. If you want to capitalize your utilities and insurance, you may want professional advice. (You can also choose to capitalize your mortgage interest and property taxes, if you prefer not to deduct them on schedule A or if your itemized deduction is already limited by the SALT cap.)
We have purchased a house to flip.
Is "we" in the business of buying and selling property? If so, then the house would be inventory in the business and listed as such in the inventory section of whatever type of business tax return you would be doing. (1065 partnership, 1120, or 1120-S corporate return)