Tax issues regarding "flipping of a house"

[dotrog15]

Purchase of house, repair and upgrade, and sale will all occur in 2016

[SweetieJean]

Are you a professional flipper?

[SweetieJean]

Also are you the sole owner of the property?

[Hal_Al · Accepted solution]

It depends on what activity you are doing as the taxation of "flipping" houses depends on how you are doing it.  Examples:

• If you purchase one house and "flip" it for a profit, it is a capital gain.  If sold in one year or less, it would be a short term gain.  If sold after being held for more than one year it would be a long term capital gain and would be entitled to favorable capital gains rate treatment.
• If you purchase multiple houses and "flip" them for a profit (i.e. you are actively engaged in buying and selling houses) you may be engaged in a business.  If you are, you lose the favorable capital gains rates and must pay self-employment tax on any profit.  Bad news:  the IRS has no specific criteria as to how many houses or how often you need to sell them to lose capital gains treatment.
• If you purchase houses, rehab or clean them up and then resell them, your profit is coming from "sweat equity" and would be business income, subject to ordinary income rates.  After all, what you're doing is almost exactly the same as what a homebuilder does.

Unfortunately, the line between the different scenarios is not clear except in the extreme.  The purchase and sale of one "flip" house would be a capital gain, the purchase and sale of multiple houses as your primary source of income would be a business.

Which one applies to you?

[Hal_Al]

In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)
 - Wages & Income
-         “I’ll choose what I work on” Button
Scroll down to:
-Investment Income
   -Stocks, mutual funds, Bonds, Other (Real estate is other). Answer no, when asked if you got a 1099-B. then follow the interview. Choose "Everything else", not 2nd home, as investment type.

NOTE: For 2018 and later years, carrying costs are no loner deductible or eligible for capitalizing, with the exception of mortgage interest and real estate tax. 

The carrying costs (e.g. insurance & utilities) of investment property are deductible as investment expenses, but are subject to being a misc. itemized deduction also subject to the 2% of AGI threshold. Real estate (property) tax may be deducted on schedule  A, under taxes, without regard to the 2% rule.
Alternatively, taxpayers can elect to capitalize (add it to your cost basis)  the carrying costs of unimproved and nonproductive real property, real property under development or construction and personal property before its installation or use (Regs. Sec. 1.266-1(b)(1)).  The election is made with the tax return by its due date, including extension, by attaching a statement. You cannot wait until you sell the property, but must make that election each year. Attach the statement to the return and write “Filed pursuant to section 301.9100-2” on the statement.
Mortgage interest is only deductible to the extent of other investment income and not subject to the 2% of AGI rule,  but can be capitalized. (<a rel="nofollow" target="_blank" href="http://www.nolo.com/legal-encyclopedia/tax-deductions-vacant-lands.html">http://www.nolo.com/legal-e...>)

[Hal_Al]

Deleted