S-Corp for House flipper

[rwm221]

I have not done many S-Corp returns and this is the first for a house flipper. My client bought the house in January for 207,000 and sold it in September for 1,012,500. An inverter lent them 840,000 towards the purchase and renovation plus he received interest. During the year they paid him $38,000 in interest, then when the house was sold, he received his $840,000 back at closing since it was a lien against the house. Is the $840,000 an expense that can be written off or just the interest.

Thank You

[Rapid Robert]

Why did he borrow $840K if the house only cost $207K? (or did I mis-read your post?)

In any case, a loan is not income and a loan repaid is not an expense.

[Maribeth]

The supplies and labor paid for with the $840,000 loan proceeds are deductible. As is the interest paid on the loan. You've got two things going on: the financing of the improvements to the house AND the actual improvements themselves.

[rwm221]

The $840,000 was used for purchase of the house and the renovations needed before the flip

[Rapid Robert]

"The supplies and labor paid for with the $840,000 loan proceeds are deductible."

Right, but the purchase price for the property is not - it is part of basis. To repeat, neither borrowing money nor paying it back is a taxable event (paying or receiving interest is, but that's not borrowed money). For tax-deductible expenditures, the source of the funds doesn't matter - gift, savings, loans, whatever.

[edit]: or perhaps instead of basis, I should refer to COGS, since this is a house flipper and the houses are inventory.