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Level 2

We flip houses. Owe investors interest from sale of house in 2018. Won't be able to pay the funds to til 5/15/19. Put expense of interest in 2018 but 1099s in 2019?

We buy, rehab and sell houses under an LLC.  In 2018 our mom and aunt invested with us to get another property.  We sold the property but didn't have the funds to pay their interest.  Being family, they are patient with us:)   I had reported the interest expense under the property that they invested in and that we sold in 2018.  Since they are not paid yet I was planning to create their 1099-int in May of 2019 (when they are getting their checks) but just realized that this might not be the right way to file.  Pretty new to this and am making some rookie mistakes.   I did file an extension for the LLC and my personal taxes.

Any help would be appreciated.   Thank you!

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Level 12

We flip houses. Owe investors interest from sale of house in 2018. Won't be able to pay the funds to til 5/15/19. Put expense of interest in 2018 but 1099s in 2019?

What you reported is okay if you choose the accrual accounting method.  It is the more complicated of the two methods to reconcile, but with the accrual method, income is deemed earned when it is billed, and expenses are deemed paid when they are incurred.  It is a method that can be complicated because if you claim income, but don't get paid, you later have to let reasonable time pass before writing off the bad debt as a deductible expense, and that is complicated for your books.  With the cash method, you count expenses when you pay them (even on credit), and income when you are constructively paid.  (For instance, if you were to receive a check late in December that you couldn't cash until January, it is income for this year not next year).

If you plan to use the cash method for income and expenses (recommended), then do not count the interest as paid in 2018 if you did not pay it then.  If you choose the accrual method, you may claim the expenses then.  With either method, it looks like the sale happened in 2019.

One other tip for a house-flipping business.  Use Cost of Goods Sold for your expenses.  This is an inventory method that will keep expenses suspended, in effect, until the property sells.  All of the expenses on the house and the purchase of the house itself is converted into inventory, which does not become a deductible expense until the propert sells.  Other expenses you incur (licenses, insurance, etc.) do still count in the tax year they are incurred.

1 Reply
Level 12

We flip houses. Owe investors interest from sale of house in 2018. Won't be able to pay the funds to til 5/15/19. Put expense of interest in 2018 but 1099s in 2019?

What you reported is okay if you choose the accrual accounting method.  It is the more complicated of the two methods to reconcile, but with the accrual method, income is deemed earned when it is billed, and expenses are deemed paid when they are incurred.  It is a method that can be complicated because if you claim income, but don't get paid, you later have to let reasonable time pass before writing off the bad debt as a deductible expense, and that is complicated for your books.  With the cash method, you count expenses when you pay them (even on credit), and income when you are constructively paid.  (For instance, if you were to receive a check late in December that you couldn't cash until January, it is income for this year not next year).

If you plan to use the cash method for income and expenses (recommended), then do not count the interest as paid in 2018 if you did not pay it then.  If you choose the accrual method, you may claim the expenses then.  With either method, it looks like the sale happened in 2019.

One other tip for a house-flipping business.  Use Cost of Goods Sold for your expenses.  This is an inventory method that will keep expenses suspended, in effect, until the property sells.  All of the expenses on the house and the purchase of the house itself is converted into inventory, which does not become a deductible expense until the propert sells.  Other expenses you incur (licenses, insurance, etc.) do still count in the tax year they are incurred.