Investment Interest?

[LawrenceGR]

I have a client that bought a house in 2007 for the purpose of flipping it. The market has not been in their favor, they have dragged their heels to a point where they are considering renting the property. Now they have a bit of interest that has to be dealt with, the question is should apply the interest to the basis of the rental or should I put it on Sch A as investment interest?

[ChEAr$]

Do you have

I have a client that bought a house in 2007 for the purpose of flipping it. The market has not been in their favor, they have dragged their heels to a point where they are considering renting the property. Now they have a bit of interest that has to be dealt with, the question is should apply the interest to the basis of the rental or should I put it on Sch A as investment interest?

a cite somewhere for being able to add interest to basis of the house?

[dsi]

Isn't the cite the 266 election?

[ChEAr$]

Reason

Isn't the cite the 266 election?

I asked was original statement that this was a property to be "flipped", meaning, I take it,
as buying a property, putting some work into it and selling it, all schedule c stuff.

Or maybe "flipping" can mean buying a reselling a property with nothing done to improve
or renovate it atall.

How would you handle the interest in both these situations?

[LawrenceGR]

I don't have a cite

The whole thing is a little sticky. Last year the guy brought me a comercial loan interest statement but I did nothing with it, this year he has a principal home int statement. I am actually looking for some way to charge off the expense or somehow use the interest to his advantage. It does seem reasonable to add the interest expense to the cost of the property as it is a cost incurred to get the house up for rent. I am certainly willing to listen to pros and cons on my reasoning.

[JG EA]

I have a client that bought a house in 2007 for the purpose of flipping it. The market has not been in their favor, they have dragged their heels to a point where they are considering renting the property. Now they have a bit of interest that has to be dealt with, the question is should apply the interest to the basis of the rental or should I put it on Sch A as investment interest?

Flip is C usually in my opinion, but they seem to have changed its from business property to investment (rental property). I'd start with when it was changed. I'd capitalize the interest before the time it was rented. Then I'd take the basis and start from there as rental property. Then start the interest deduction on E from that date. How does that sound?

[erchess]

Jg

If I'm reading right the end of 08 found a house flipper who is a calendar year taxpayer in possession of a house for which there had been expenses including interest but no income so that as of 4/09 the owner was considering converting it to rental use but even at that date had not made a firm decision to do so.

In the case of a flipping house seller I would say business opened when at least one house was put on the market. I"d capitalize all expenses incurred before that date and expense the others whether or not there was any income. We are of course talking about a Schedule C.

If the decision is made in 09 to convert it to rental use then that's no particular problem as long as you remember the date on which efforts to sell ended and efforts to rent commenced and of course the date of every expense. In this Scenario a C (marked as business disposed of) and an E get filed for 09.

It's late and if I'm overlooking law or facts I am sure someone will jump in and say so.

[LawrenceGR]

More info

I want to add that this house was purchased in 2007 and at this time it is still not ready to either sell or rent. I keep gathering expenses for this house but there is no real place to put them. Time is running short and want to finish the return but, I don't to short my client. Thanks for all your input.

[Jesse]

Thinking out loud.........

A dollar today is better than a dollar tomorrow - take the schedule A expense currently.

Unless you foresee client renting this property and in a higher tax bracket down the road, add to basis as that dollar will be worth more tomorrow?

Or, if this will end up on a schedule C, I would then elect to add to basis as it will decrease the SE tax and the expense will definitely be worth more tomorrow.

[LawrenceGR]

I like it

From what I can tell this will end up being a rental, so I think I will keep track of the interest expense for 07 & 08. I think the dollar tomorrow will serve him better.

[Jesse]

LawrenceGR - I believe you must elect to do this by attaching a statement to the return - but before you take my advice someone else jump in and confirm because I'm second guessing myself.

I was going to look up the election statement but on page TTB 4-14 it says you can elect to add to the cost basis of unimproved land.........is it just undeveloped land or real estate?

I wish I had more time to research.

[LawrenceGR]

Real Estate

I thank you for taking time to look into this, I did look up a couple Pubs on the IRS website but I couldn't find anything that would case my idea in stone. I really can't say for sure this is going to sold or rented, however, with the market in our part of the country I think he will rent it out. As I said before he bought this place in 2007 and he still hasn't finished it. I hate to see the guy eat the interest but I don't know whatelse to do.

[JG EA]

I've always found in my research that capitalized expenses do no need an election, but to carry does. In other words capitalized is a requirement (if required) and carrying is an election to do so because it is not required and the tax and interest could be taken currently..

[Davc]

If substantial work is being done on the property then it probably falls under the rules for "self constructed assets" which means everything is capitalized until the work is completed no election neede.

[JG EA]

If substantial work is being done on the property then it probably falls under the rules for "self constructed assets" which means everything is capitalized until the work is completed no election neede.

I wish I could talk like this. That is what I was trying to say.