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Level 1

I buy, remodel, then sell homes. How do I claim income on form 1065 and not pay capital gains on the profits we make. There are four of us and we do all the work.

I am filing a Form 1065.  My LLC has four members and we buy, remodel and sell residential homes.  We do all the work ourselves, and I am wondering how to report our income when we sell the house since we don't pay ourselves for the work we do.  Will I have to pay capital gains even though we did the sweat equity?

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Level 11

I buy, remodel, then sell homes. How do I claim income on form 1065 and not pay capital gains on the profits we make. There are four of us and we do all the work.

You won't pay capital gains taxes.

However, you will pay taxes on earned ordinary income and subject to self-employment tax.

The net profit of the partnership is the "pay" to the partners for their work.

You are in the business of dealing real estate with the remodeling thrown in.  This is true when done in the LLC and filing Form 1065

See this link for general information on small business

https://www.irs.gov/publications/p334/index.html

I have copied and pasted some information from various web pages that should help

Individuals who actively purchase and remodel real estate for profit on a continuing basis. They are classified by the IRS as dealers rather than investors. For these people, the real estate is treated as inventory, rather than capital assets, and the profits on the sale of those properties are treated as ordinary income, subject to the self-employment tax.

Many expenses must be capitalized and allocated into each project, and then deducted when that project is sold.

  • The cost of the home itself
  • Direct materials
  • Direct labor
  • Utilities
  • Rent
  • Indirect labor
  • Equipment depreciation
  • Insurance
  • Production period interest
  • Real estate taxes allocable to each project

https://taxmap.ntis.gov/taxmap/ts0/publication3780tax_p_2e56b2c1.htm