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    Flipping

    Before the real estate crash, a growing number of people were "flipping" houses.

    The process involved buying (and mortgaging) a dilapidated residence at depressed prices, engaging various trade contractors to perform restoration, then selling the finished product for a good profit in a strong housing market. Often the "flipper" didn't have to do as much as pick up a hammer to achieve this easy profit, although if he had any skills to do any work himself he could add to the profit. The "key" was finding a house in such needy condition that the mass of buyers wouldn't want to buy it and go to the trouble to make it worthy of their living expectations. And these houses clearly exist almost everywhere.

    One client did this and I claimed the profit on Sch D since the process took well over a year. As we took LTCG, he had three more such houses mortgaged, and I told him we were going to have to report on a Sch C in the future. Then he moved 300 miles away, used another preparer, but still made local contacts and many trips driving to get the work done.

    As fate would have it, now he has moved BACK here. During the years that transpired, he sold one more house at a profit before the crash, and was then stuck with a couple houses that wouldn't move. In 2009, he had to sell these two at whopping losses, and I'm expecting to see 1099-Cs when he comes. And of course, none of these were his personal residence.

    I believe Sch C is as appropriate now as it was before the crash. Working three ongoing house jobs is hardly an "investment". Of course, Sch C is now to his advantage, since the jobs are now at a loss and not limited to $3000/yr. And, of course, the cost of these homes will have to be adjusted downward if any 1099-Cs apply.

    Does this sound like Sch D or Sch C to the readers? By the way, "flipping" has dramatically lost its appeal.

    #2
    Snags - you can look through IRC Sec 469, especially TR 1.469-4 because it defines the difference between a passive investment and a business.

    Don't you wish it was either two properties or ten, instead of that "gray" area?

    I guess I'd be looking particularly at his level of involvement.

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      #3
      I am kinda glad that whole flipping houses is over. I had a few that flew the coop when I told them it would be a business.

      Snag, the one that he sold when he moved, was that reported on a Schedule D? Also what was his level of involvement? Like Hoff said I would be looking at that.

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        #4
        There is also a definition of a Real Estate professional within the IRS publications that involves the number of hours worked, and the type of work when not licensed, and how to treat the income and classify purchased property for resale.

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          #5
          Why would the number of houses make a difference

          between C or D? If I own 1 mutual fund it's an investment, but if I own 3 (or 10, 20 or 30 for that matter) am I no longer an investor, but instead a trader? I think the facts and circumstances are much more important than the number of properties. If I had $1 million investable dollars and bought 10 properties @ $50k each and then put $50k in improvements in each one (hired contractors who did all the work, used a realtor who did the marketing, hired a lawyer to handle the closing) and made a $20k profit on each house while still working 2000 hours a year as an accountant am I now also in the business of flipping properties? NO, I'm an accountant that invests in real estate.

          My opinion, of course. Facts and circumstances!

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            #6
            Flipping

            What absurd vernacular. Flippant might be more accurate.

            It makes me think of terms like increase your cash flow irrespective of profit. Or whole life, investing for your future.

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