Flipping Houses

[Howco]

Taxpayer buys house. Complete renovation. Sell for profit. Not personal residence.

Taxpayer bought the home more than a year prior to selling it. But many of the costs of renovation were incurred within a year of the sale date.

Is this gain long-term or short, or combination, similar to selling stock or mutual funds with reinvested dividends?

[TXEA]

The better question is whether the seller is engaged in a trade or business and subject to self-employment taxes. I would encourage you research the message board on dealer vs. investor before reporting this as a Schedule D transaction.

If this is an isolated sale, you can probably argue investor; although, the court looks at the intent at the time of purchase among other factors in deciding on dealer vs. investor.

[Roland Slugg]

Although I usually try to include a cite with most of my posts, I'm just going to shoot from the hip here and offer my "knee-jerk" opinion.

A combination of LT and ST gains.

The difficulty will be to make the allocation ... i.e. how much of the selling price to allocate to the > 1-year basis and how much to allocate to the < 1-year basis. Any reasonable allocation will probably pass muster in case of an IRS audit.

[taxea]

I would consider this a business engaged in for profit.

[JoshinNC]

Go by the date of purchase

The additional costs incurred do not "restart" the acquisition date. The acquisition date is the acquisition date.

This doesn't answer the question the others have raised regarding whether this is an investment sale or a business, but the acquisition date would be the same under both applications.

[ATSMAN]

I thought I read somewhere that if you are flipping houses, then you are a dealer.

[ddoshan]

I believe that if this is a one time or very occasional thing then I would consider it an investment. If it is something the client does every year then probably not.

[JoshinNC]

If you buy a used '69 Chevy once a year

I thought I read somewhere that if you are flipping houses, then you are a dealer.

Put a new engine in it, do some body work and sell it, are you a car dealer?

If you buy one armoire once a year, restain it and sell it, are you a furniture dealer?

[TXEA]

This is a tough issues to tackle. I have read a few of the court cases relative to dealer v. investor and there are about eight factors that are used in determining status. Notable of these include:

Intent at the time of purchase - if you bought it with the intent of holding the property for appreciation, then investor may weigh heavily on the court. Even if you had intent to hold but sold quickly, you could still be an investor. If you bought with the intent of selling (fixing up) then dealer weighs heavily.

Other business activity - Does the taxpayer have full time business interests that require substantial time and involvement?

The extent of business activity with properties - is there a sales office. Do you hold other properties for sale in the ordinary course of business? Do you regularly sell and acquire new properties?

One judge in one of the cases said to ask 100 (e.g.) accountants and attorneys the difference in dealer and investor in these small cases and you will get 100 different answers.

I am generally concerned most with intent and extent of activity. If a taxpayer does an isolated fix up and sell, I am hard pressed to argue they are in a trade or business. It could be a hobby at that level.

Beyond that we all have to use our best judgement.

[Burke]

The term "flipping houses" automatically means to me that the intent to sell for a profit was there, and there was no intent to live in it, rent it, or otherwise hold it for long-term appreciation. If that is what the TP said, then take it at face value.

[ATSMAN]

Put a new engine in it, do some body work and sell it, are you a car dealer?

If you buy one armoire once a year, restain it and sell it, are you a furniture dealer?

If you are "flipping houses" then your intent is to buy cheap, fix it up and sell for profit. You are not holding that property to appreciate or leave it to your children.

It will be virtually impossible to convince an IRS auditor that it was held for investment and that you are a casual investor!