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JD-Hawki
Returning Member

How do I work with an Inventory/Cost of goods that consist of a house I bought for cash and rehabbed last year and did not sell and has now carried over to this year

I have a small part time Real Estate investment LLC. I have sold most of my properties off .  I still have 1 property that I  bought in 2016 (cash and rehabbed) and am selling this property on a rent to buy contract. I bought and rehabbed this property in 2016 and itemized everything. As a result because I did not get the property sold in 2016 I have a large Inventory/cost of goods carry over to this year. I did get the property sold on a option to buy in April of 2017 and am receiving monthly payments for two years at which time they can either apply their option to buy of walk away. I do not have a clue how to deal with the Inventory/cost of goods I have carried over to this year. Appreciate any feedback in how to address this issue. I am using TurboTax home and business software.


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Accepted Solutions
PatriciaV
Expert Alumni

How do I work with an Inventory/Cost of goods that consist of a house I bought for cash and rehabbed last year and did not sell and has now carried over to this year

Yes, you have two options for reporting this situation.

1. Defer reporting the sale until the rent-to-buy contract has expired. 

2. Report the sale this year

If you choose the deferral option, you would continue to report your inventory each year as it is now. The payments you receive will be handled in two parts.

a. The "rent" portion of each payment is reported as Rental Income.

You can report this activity under Wages & Income >> Rental Properties. Please follow these instructions: Where do I enter income and expenses from a rental property?

b. The remainder is considered "escrow" that will factor into your gain or loss when the sale is closed. This portion is not included on your tax return until the end of the contract.

For example, if they pay $1000 a month and $700 of that is considered rent and $300 goes towards the down-payment, then you claim $700 as rental income on your taxes. The $300 is held as a lump-sum payment when they exercise their option and actually purchase the property.

Your other option is to report the entire sale this year. In this case, you would report zero ending inventory, and the contract sales price as business income. (The two offset to create a gain or loss for the transaction.)

The tax implications of the tenant failing to exercise their option is beyond the scope of this forum. You may wish to consult a real estate professional for assistance in deciding which option is best for your particular tax situation.

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1 Reply
PatriciaV
Expert Alumni

How do I work with an Inventory/Cost of goods that consist of a house I bought for cash and rehabbed last year and did not sell and has now carried over to this year

Yes, you have two options for reporting this situation.

1. Defer reporting the sale until the rent-to-buy contract has expired. 

2. Report the sale this year

If you choose the deferral option, you would continue to report your inventory each year as it is now. The payments you receive will be handled in two parts.

a. The "rent" portion of each payment is reported as Rental Income.

You can report this activity under Wages & Income >> Rental Properties. Please follow these instructions: Where do I enter income and expenses from a rental property?

b. The remainder is considered "escrow" that will factor into your gain or loss when the sale is closed. This portion is not included on your tax return until the end of the contract.

For example, if they pay $1000 a month and $700 of that is considered rent and $300 goes towards the down-payment, then you claim $700 as rental income on your taxes. The $300 is held as a lump-sum payment when they exercise their option and actually purchase the property.

Your other option is to report the entire sale this year. In this case, you would report zero ending inventory, and the contract sales price as business income. (The two offset to create a gain or loss for the transaction.)

The tax implications of the tenant failing to exercise their option is beyond the scope of this forum. You may wish to consult a real estate professional for assistance in deciding which option is best for your particular tax situation.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

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