I have a new client who purchased a house to flip in 2014. He flipped the house in 2015. He did not record anything on his 2014 return. All through 2014 and 2015 until he sold it, he gutted the property and had capital improvements. How do I record the sale of this property? Do I put it on schedule E (even though there was no depreciation taken) and let it carry over to form 4797, capturing depreciation he should have taken? Or, do I go straight to the 4797 and record the sale as 1250 asset? What is your recommendation?
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It doesn't sound like an investment. It sounds like inventory. -
How often does he do this? If this was his first time, it's a capital gain ... either ST, if held less than 1-year, or LT, if held more than 1-year. You said he bot in 2014 and sold in 2015, so it could be either.
On the other hand, if he does this frequently ... say once or twice a year in each of the last three or four years -- then it starts to look more like a business, resulting in the profits being taxed as ordinary income AND subject to the SE tax.
Unfortunately, the IRS has no clear-cut or definitive rules regarding the "investment" versus "business" question. I would say, however, that anyone who flips a house more than about once every other year should be cautioned about the IRS asserting the "business" standard.
In either case, no depreciation would be taken, so that part of your concern is moot.Roland Slugg
"I do what I can."Comment
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IMO, it is a Schedule C activity. He had all the intentions of making a profit, and no intention to rent, nor did he.Comment
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He did not hold it until it appreciated like an investment. He actively improved the house to sell it. I agree with Burke.Last edited by Lion; 02-28-2016, 04:18 PM.Comment
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