depreciation quetion

[Unregistered]

client has new s corp that buys and resells houses/duplexes. last yr(2005) bought 5 houses all around august 15. holding right now, paying mortgages, etc. (no renters).
are these houses depreciable and as what...inventory?
(finishing up 2005 1120S), thanks for all responses.

[Bees Knees]

If you are buying and selling houses without renting, then the houses are inventory. No depreciation.

If you place them in service in a rental activity, then you start the depreciation process.

[outwest]

Depends on intent.

Your question indicates this is a "flipping" activity, the company buys homes, maybe fixes up, with the INTENT to resale shortly. The properties are then inventory and no depreciation is taken, repairs are added to inventory, and income or loss is ordinary. (Incidently, this is the ONLY scenario where it POSSIBLY is okay for a corp to hold real estate. Even then it's shaky, a debate for another day.)

On the other hand, if the INTENT is to rent (and actions support it), then they are no longer inventory and depreciation is available. But this is generally not a good activity in a corporation.

Doug

[veritas]

What does this word "flipping" mean. It sounds like scam talk. Kinda like when an individual wants to talk about "cash flow".

[outwest]

Real Estate jargon for ..

buy, fix up and sell. Usually the plan is to do in a short period of time. Plans don't always work out.

Doug

[John of PA]

Flipping

My understanding of "Flipping" (what I have seen) is buying a property, and the same day or next day, putting it up for sale at a higher price. I have a client who was successfully doing this with vacation homes during a hot market, however, the party is now over, the market has stableized. No this is not a scam, just specaulative investing, taking a risk.

[DaveO]

Here it's a short term ownership of a house. It's comman for this sort of thing to start in an overheated market usually near the top before the bubble burst. I have 3 new LLC or Corp clients who started doing this in the last year. They buy distressed properties, often at foreclosure or tax sale, throw some paint on the walls and carpet on the floor, unplug the drains, mow the weeds and put it back on the market. All in hopes of making a profit. Of course things don't always work out.