Deductions when purchasing a home to flip in 2015, and selling it in 2016?

[tarad6]

We purchased a home to "flip" in July 2015, and will be selling it in March 2016. What should I deduct this year vs. next year? I was going to deduct the real estate taxes and insurance this year, and wait to deduct all the labor and expenses next year (to offset the income form the sale of the home). Is this correct?

[SusanH · Accepted solution]

If you are considered a real estate professional and filing a Schedule C, you can deduct the taxes and insurance. If you are not, you must wait until you sell the property.

Since this was purchased as an investment to fix and resell, you add the carrying costs including mortgage interest, property taxes and rehab expenses to the basis of the property. When you sell it, all of these costs (and others from the purchase) become part of the adjusted basis for determining gain or loss on the property. Property taxes are added to the basis and are not deductible on Schedule A since they are considered a business expense, not a personal one, because of the status as an investment property.

Next year you will report the sale under the investment section unless you are considered a real estate professional; if you need directions at that time, please post a new question.  Until the property is sold, you do not report any expenses from the purchase or updates you have completed except as noted above for real estate professionals.

[Kevin18]

Clarifying question:  I'm in the same situation where I sold the flipped property in January 2016 but most of my expenses were paid in 2015.  2015 was my first year of operation and this was my first project.  Are you saying that I am to report all of my business expenses (including company car lease) from 2015 when I file my 2016 taxes next year?  In that case, do I still need to file anything for my LLC this year for 2015 since no sale was made in 2015?

[SusanH]

If your LLC's business is flipping properties, you can deduct the normal type of business operating expenses, office supplies, phone etc. You can also include business mileage or the business portion of a car lease (if taking actual expenses) that you had during 2015. You cannot deduct any of the rehab costs until the property is sold.

If the LLC is only in existence for this one property and will dissolve when the property is sold, then all of the expenses go to basis and are taken into consideration when you sell the property.

[Kevin18]

In regards to the capital contribution, my partner and I both contributed cash towards the purchase of the house that we flipped, however we did not sell and distribute until 2016. Would I then leave the capital contribution part zero for 2015 and enter that for the 2016 filing since it is specific to the project?

[SusanH]

No, you should report the true capital contribution because that doesn’t change.
As an example, if you each contributed $50k in capital to the LLC, bought a property for $80k and spent $20k in rehab costs, the amount you contributed to the LLC didn’t change. You still each contributed $50k, only the form in which that equity was held was changed; you each simply converted the $50k that was a cash asset to a $40k property asset and $10k in additions to asset basis.

[Kevin18]

In what way will the cash contribution amount affect the tax return?  Unfortunately I already filed and left the contributions blank.  Would I need to wait till next year to amend this year's return to include the cash contributions?

[SusanH]

It won't affect the return as far as income/loss. If you've already filed as zeroes, that's fine. Just make sure that you report the cash contributions properly on your 2016 return when you report the sale of the property.

[mazlovski]

How do you treat utilities paid while renovating the property? Can they  be capitalized or do they  need to be expensed in the year they were incurred?

[SweetieJean]

@mazlovski  Please start your own question thread,

[cdrisom]

How do you treat utilities while renovating a property to flip?  Can they be capitalized or exposed in the year they were incurred?