Flipping Houses

[geekgirldany]

Just got a new client that is going into "flipping houses" with a friend. Just wondering if any of you have dealt with this?

I told them to make sure they open a joint checking account to keep the house expenses separate from their personal checking. I believe the mortgage interest would also have to be reported in both of the client's social security numbers, correct? Also when does this turn from investment to business? They both have fulltime jobs.

She was asking about reinvesting the profit made off a house back into another home/s. I know that a like-kind exchange can be done but isn't this really just deferring the income/capital gains until the next property sales? How many times can a properties be exchanged/deferred?

One more question (sure to be more) the 45 days in which the like kind property has to be identified... I read in a article on flipping houses that the client can never actually touch the money made off the deferred home and it should be put into a trust. Is that right? I thought just as long as the property is identified and receipt is within 180 days after transfer or due date for the tax return for the tax year in which the transfer of the property occurs (whichever is earlier) everything is okay.

Sorry for so many questions. I appreciate any comments
Thank you

[abby]

intent

This is one of those issues where intent is central.

If there intention is to fix up houses and resell, then this property is inventory and not eligible for exchange.

The intent must be to hold for investment or use as business property to be eligible for exchange.

There are differing opinions on how long a property should be held to qualify as 'held for investment', but ultimately it's going to come back to intent.

If they are not gearing towards exchanging the property, the question does come up if this should be a sched D or sched C sale - and that's your question about when this becomes a business. I know that we have clients who might buy a house and sell after a fix up, and we sometimes will treat this as a sched D sale, but that is a decision made based on the circumstance - the IRS could well say that if your intent was to flip, then it's inventory and belongs on sched c, period.

For exchanges, it is correct that the money can't be touched. There are accomodators that hold the cash and handle the exchange for a fee - most do this for a relatively modest fee - $250-$500 per exchanged property. The TP should always use an accomodator unless the buyer and seller are exchanging properties directly with each other.

Hope that's some help!

[taxmandan]

Flipping houses

She was asking about reinvesting the profit made off a house back into another home/s. I know that a like-kind exchange can be done but isn't this really just deferring the income/capital gains until the next property sales? How many times can a properties be exchanged/deferred?

One more question (sure to be more) the 45 days in which the like kind property has to be identified... I read in a article on flipping houses that the client can never actually touch the money made off the deferred home and it should be put into a trust. Is that right? I thought just as long as the property is identified and receipt is within 180 days after transfer or due date for the tax return for the tax year in which the transfer of the property occurs (whichever is earlier) everything is okay.

Sorry for so many questions. I appreciate any comments
Thank you

If they are buying properties for resale it does not qualify for 1031 LKE deferral. The property would be inventory and TTB, page 6-14 gives a list of property that can be tax deferred and property that is held primairly for sale does not qualify. If they buy and rent it out as passive investment activity then it would qualify for LKE.

For any LKE, they need a Qualified Intermediary to handle the transactions, you are correct they cannot touch the money. The QI will hold it in an escrow account until everything is done.

[geekgirldany]

Thank you for responding. You both helped alot. The reason I mentioned the LKE was because I read this article on flipping houses: http://www.bankrate.com/brm/itax/new...1.asp?caret=13
So I was unsure on the LKE. I see in TTB on the property being held primarily for sale.

I guess I need to tell them to be careful on how many houses they buy. They already have a contract on 4. Since they do have full-time jobs and also another part-time job. I thought that the flipping the houses could still be looked at as investment only. This is so sketchy on the business vs investment. I need to get some more information from them on how many they intend to buy, are they going to continue doing it for several years, etc. My gut tells me business if they continue doing this past a year.

I've always wonder about this flipping houses tax effects when watching those shows on tv showing them doing it.

Thank you again