Real Estate Investment Property Sold

[PPJCPA]

I have a client who purchased a home in 2015, repaired it and sold it in 2016. They are not in the real estate business and aside from this "flip" they have one more. Originally they purchased both properties to fix up and then rent but decided they just wanted to get rid of them both and not deal with rentals.

My question is can I capitalize the utilities expense they have incurred while repairing the home to sell?

[spanel]

I have a client who purchased a home in 2015, repaired it and sold it in 2016. They are not in the real estate business and aside from this "flip" they have one more. Originally they purchased both properties to fix up and then rent but decided they just wanted to get rid of them both and not deal with rentals.

My question is can I capitalize the utilities expense they have incurred while repairing the home to sell?

I would not. I would put all expenses associated with the 2nd flip house in inventory on the Sch C.

Chris

[Roland Slugg]

My question is can I capitalize the utilities expense they have incurred while repairing the home to sell?

Not just "can," but "must." Costs incurred during the construction or improving of real property fall within the uniform capitalization rules. See Code §263A(g)(1).

One of the more common questions seen on this forum pertains to the "flipping" of houses and whether that activity constitutes a business or if the sales are capital in nature. There are no clear-cut rules or guidelines. Rather, it depends on intent and frequency, and the two are inter-related.

Your client's intent was to create rentable properties, and then he changed his mind. It was not his intent to go into the "business" of buying and "flipping" houses. Therefore, I do not believe that two such "flips" in a short period of time constitutes a "business." I would report both sales on Schedule D.

[BHoffman]

From experience very similar to your own, I agree with Roland Slugg. Reported on schedule D and heard nothing. My client was not in business to flip houses, he just ended up with 2 fixeruppers he intended to rent but the housing market was booming when he finished so he changed his mind and decided to just sell them. Include all of the expenses in the cost basis.

[PPJCPA]

I Agree

Roland Slugg and BHoffman,

Thank you for your response. I planned to add to schedule D because it is apparent to me they will not be purchasing any more homes for this type of activity. I really was questioning the carrying costs of the utilities and if I could add that to basis. After further research, I found I had to make the election to capitalize the carrying cost. Therefore I made the election on this year's return and could only capitalize the 2016 utilities and not 2015 because I did not make the election for that year.

Thanks again for your feedback.

Greatly appreciated.

[TAXNJ]

R. Slugg

Well stated and agree.

One of the key comments is when you stated, “Rather, it depends on intent and frequency, and the two are inter-related.”

There are a number of Tax Court cases, in general, considering both the “intent and the frequency”, that provided several important elements to consider when determining the intent of a transaction.

As you may know, those elements apply to decide whether or not an asset is a capital asset within the definition of Section 1221.

Again, well stated.