Flipping Real Estate

[RWG1950]

When might "flipping" real estate be deemed a business by the IRS & go on a "C" instead of "D" ?
My customer sold in 2019 a property (house) he bought a couple of years ago that he had intended to "flip".
He never lived there - just bought it to rehab & sell.
I assume this sale would be a capital transaction.
He called today to say he wants to buy another property to do the same.
Just wondering, when people "flip" real estate, at what point could the capital asset becomes a business asset.

[taxmom34]

we've had this discussion a number of times. I believe the general opinion was : one time flip schedule D, more than one its a business, schedule C

[ATSMAN]

taxmom34 is correct AND you also have to look at the intention of the flipper. For example if the flipper setup a LLC to do business then the intention was clearly not to do a one time flip but possibly do it more than once if the first one made money. Two years back I had a client who formed a LLC with his brother to flip one house but they ran into some legal issues and actually lost money. After that they sold their unfinished second property to another flipper.

[RWG1950]

Additional info on this case. Retired customer MFJ is low in the 12% marginal federal bracket.
He had bought a trailer in an area theme-type park a couple of years ago. He had used it but it was not his personal residence.
Renovated it & sold it in 2019 for $12,000 profit. He had never "flipped" before.
He also owns a vacation cabin on a lake. He tells me the property next door has come up for sale & he feels he can buy it, rehab & sell for a higher price.
He also says he'd like to retain (and not resell) the lot that would be acquired as part of the purchase between the properties as a "buffer".
Probably such a sale wouldn't occur until 2020. He tells me, at his age, it's unlikely he'll be buying and "flipping" any other property.
Filing a "C" would mean forsaking the zero % fed LTCG rate and paying ordinary tax rates for fed, state, soc sec & medicare tax on his potential profit.
I'm inclined to believe filing these transactions as capital gains on a "D" would be more appropriate for this situation.
Am I taking an unreasonable position on this ?

[Burke]

I take the position of the intent of the "flipper." If he intends to buy/sell for a profit, it is a business just like any other new business that is started. Sometimes it doesn't work out and there is a loss. How many times a person/entity starts one of these projects is immaterial. Also what he says about any future purchase/sales would not enter into my decision. The trailer appears to have been a personal use/vacation home, and might not be considered a business transaction, since he had used it in the past. The property at the lake he is proposing to buy and sell certainly would be treated as such.

[RWG1950]

Don't mean to beat a dead horse, but maybe I'm missing something on this.
I've looked in TTB, checked the IRS website & reviewed my tax seminar update materials. Can't seem to find anything on flipping" real estate.
The internet, though, has a ton of articles on this subject. Most of these seem to identify or define "flipping" as short term transactions on more than one property.
Such "flips", as discussed, seem to be done on a regular basis, likely yearly.
As I understand it, for most individuals, real estate investment is a capital asset - subject to CG rates at disposition. (unless you're a flipper & deemed to be in business)
If my customer sold a trailer he had held for two or so years in 2019 and acquires the property described in 2019 but doesn't sell it for a year or two, is that "flipping" ?
People with net hobby income get to put this on line 21 w/o having to file a "C" & pay SS / Medicare tax. Guy selling one house after 12+ mos is operating a business ?
His possible property purchase almost seems as much a proximity thing for him as a profit motive. He covets the lot between the properties, which he'd likely keep.
Not sure the "one and done" theory would apply in this case.

[Lion]

Is he buying and holding until the market improves? Might be an investment. Is he buying and rehabbing and hoping to sell at a higher price? Sounds like inventory in a business.

[TaxGuyBill]

Most of these seem to identify or define "flipping" as short term transactions on more than one property.
Such "flips", as discussed, seem to be done on a regular basis, likely yearly.

You need to look at if the taxpayer's activity is "regular" and "continuous". While infrequent, long-term transactions might reduce the probability if the activity is "regular" and "continuous", if a person regularly puts considerable time and effort into the activity, it could be a business even with infrequent 'flips'. For example, if he does most of the work himself and spends considerable amount of time doing it, it very well may be a business (even with infrequent flips).

I am NOT stating that I think it is a business, I am merely stating what you need to look at to determine if it is a business or not.

Also, looking at the business-versus-hobby criteria may help to determine if it is a business or not.

https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

[Burke]

The above link has to do with an error on Schedule D.

[TaxGuyBill]

The above link has to do with an error on Schedule D.

Oops, I'll fix that. Thank you.

[Toobusy]

Selling Real Estate does not go on Schedule C. Since it involves capital gain/loss, it goes on schedule D. I agree wholeheartedly with RWG1950 reply - who is NOT taking an unreasonable position..

[TaxGuyBill]

Selling Real Estate does not go on Schedule C.

It certainly does go on Schedule C if it is a business of fixing up and selling real estate. Whether or not it is a business, that is the question.