Flipping Raw Land

[iland21]

I started a land flipping business in 2021. The land is purchased raw - undeveloped - and sold the exact same way.  I do not have an entity and operate under my own name as of now. I've acquired several parcels making 3 total purchases. I've since sold 1 parcel for a small profit. I'm reporting that profit as income under my business. 

What do I do with the remaining parcels on my taxes? Do I get to expense these in some way? Assets? Inventory? Please help  

[ThomasM125]

The property taxes you pay can be deducted as such if you itemize your deductions. 

You can also elect to capitalize the property taxes and other holding costs such as mortgage interest and insurance. To do so, attach a statement to your tax return each year identifying the property and the election under code section 1.266-1. That way the holding costs will be added to the cost and deductible when you sell the property.

You should keep track of the purchase cost and any improvements made as you can add them to the cost and deduct them when you sell the property.

[AmeliesUncle · Accepted solution]

This is a self employed business on Schedule C, and you should be reporting the income a 'regular' income, NOT as an "asset". 

You should be reporting the purchases as Inventory/Cost of Goods Sold.    When you do that, it essentially means you will get the deduction when the property is sold.

[LuxAtelier]

I have a very similar question, Only we have an S corporation and file an 1120S tax return. Our business is solely raw land. We purchase and sell for profit. My partner and I are wondering if we should use COGS for purchase of land. The accountant my partner used previously prepared our taxes but listed all of those costs in “other expenses” instead of COGS. I feel like this is incorrect? Or does it matter? Also, I am curious about passive income? We are real estate agents full time and this is a side gig. Do we qualify for this to be passive income, or no? 

[DaveF1006]

If your sole business is raw land, this is not considered passive income. Passive income is income derived from an activity where participants do not actively participate in the buying and selling of land. The S-Corp is an active participant.

With this said, you can use COGS for the purchase of land and treating it as inventory but expensing it such as your accountant did is acceptable also. 

@LuxAtelier

[Zubairnsaeii]

Hello I had a question on this if my only bussiness is flipping land and I have a llc but am the sole owner I would only be filing the 1040 and will enter this income through the 1040 c and in the other income on the 1040 my question is my revenue would be the total land I sold with the profit but as per the inventory I have more land that I didnt sell say worth 400k would i put this entire amount as inventory and deduct it from the figure of other income?

[Zubairnsaeii]

Hello,

If our llc is a single person owned llc and we file the income through the 1040-C, we would add the purchases not sold under inventory and the sold property purchase price under COGS??? Like is this the proper methode?? Then when the next year comes by we would then mention the remaining property as inventory and the new sold property as COGS right???. My confusion here is wouldn't this mean that till the inventory comes down to 1 purchase that the deductions will show any actual profit against the purchase. If I purchased 4 property in the first year sold 1 then I add the 3 as inventory and 1 I'm COGS and the gross sales amount from the 1 sold the income would be negative same for next year if any sale occurs and the inventory goes down to 2 and now the cogs is 1 this deduction would still be higher than the single property sold. Please correct me on this I am a bit confused.

[Mike9241]

Small business taxpayer exemption from Sec. 471

Under Sec. 471 and Regs. Sec. 1.471-1, inventories are required to be used in a tax year in which the production, purchase, or sale of merchandise is an income-producing factor. The TCJA permitted taxpayers that meet the gross receipts test and that are not tax shelters under Sec. 448 to be exempt from Sec. 471 and to use either of the following methods:

• Treat inventory as nonincidental materials and supplies (NIMS inventory method); or
• Conform to the inventory method used in its applicable financial statement (AFS) (AFS Sec. 471(c) inventory method) or to the method in the taxpayer's books and records prepared in accordance with its accounting procedures if it does not have an AFS (non-AFS Sec. 471(c) inventory method).

It is important for small taxpayers to note that being exempted from keeping inventory under Sec. 471 does not necessarily translate to an immediate tax write-off for all inventoriable costs.

For taxpayers that choose to use the NIMS inventory method, the final regulations clarify that even though these amounts are treated as nonincidental materials and supplies, they still retain their character as inventory. The final regulations do not change the position that inventory treated as nonincidental materials and supplies is "used and consumed" in the tax year the taxpayer provides the inventory to a customer, and costs are recovered through costs of goods sold in that year or the tax year in which the costs are paid or incurred (in accordance with the taxpayer's method of accounting), whichever is later. The final regulations retain the general rule from the proposed regulations that the "used and consumed" threshold for NIMS is met only when the taxpayer sells the inventory.

thus you cannot expense the cost of unsold lots until sold.

if in year one you buy 4 and sell 1 you report the proceeds from that sale along with cost of the 1 lot sold.

that leaves 3 lots in the beginning of year 2. if you sell 2 lots you report the proceeds from the sale of those 2 lots along with the cost of the 2 lots sold

 so at the beginning of year 3 you have 1 lot and if you sell it the reporting is the same as year 1 

you may want to confer with a tax pro if this is a business the sales may be ordinary income not capital gain

[Zubairnsaeii]

Hello,

ok thanks so much, so when I sell the first 1 I only enter the cost figures for that property in the COGS. I have one last question if we purchased 4 properties in a year and sold 1  of them and we add the the cost to the purchases and add the amount purchase amount of the remaining 3 in the closing inventory the net effect would be the remainder in the COGS wouldn't this be the same thing?, for example the 4 properties purchased cost 400,000 and are entered to the purchases and we sold a property worth 100,000 if we enter 300,000 in the closing inventory and deduct the 300000 from the 400000 we would be left with a 100,000 in the COGS. and then this would be opening for the next year's return and any new purchases added to the purchases side and any property sold that year then again deducted from the ending inventory.