Investment RE expenses

[KBTS]

New client owns several rental houses and also buys one or two properties a year to fix up and then re-sell without renting. They usually sell the investment properties within a year or two of purchase. I know things like closing costs, repairs and property taxes can be added to the basis to determine gain on sale. What should be done with other expenses like utility costs, insurance, etc. they incur while holding the property? Previous accountant told them to add to basis.

[Gretel]

Basis

It sounds like your client is in business selling real estate and the houses are inventory including all costs associated with them. Subject to SE.

[KBTS]

More Info

It sounds like your client is in business selling real estate and the houses are inventory including all costs associated with them. Subject to SE.

Client is self-employed as painter and spouse works full time job. Rentals and investment real estate are on the side. Only sold one fixer upper in 2004 and one in 2005. Do not think this qualifies as being in the real estate business and thus subject to SE tax.

[Unregistered]

Client is self-employed as painter and spouse works full time job. Rentals and investment real estate are on the side. Only sold one fixer upper in 2004 and one in 2005. Do not think this qualifies as being in the real estate business and thus subject to SE tax.

You don't have to be a RE professional to be subject to SE tax, and the fact that you have another job besides the fixing up of houses to resell is irregardless as well. In your original question you said he buys one or TWO a year to fix up and sell without renting them. I agree with Gabriele, your holding inventory.

[Unregistered]

You don't have to be a RE professional to be subject to SE tax, and the fact that you have another job besides the fixing up of houses to resell is irregardless as well. In your original question you said he buys one or TWO a year to fix up and sell without renting them. I agree with Gabriele, your holding inventory.

So just to clarify, everyone believes that ALL costs (including utilities, etc.) can not be written off until the house is sold? The reason I ask, is I have a new client whose previous CPA (from a large regional firm) was writing off all the utilties, etc. as incurred and only including "hard" costs in inventory.

[MPlaks]

Your client wears two hats: a passive Sch E investor and an active Sch C rehabber. The properties he buys for resale are inventory. Absolutely every direct cost (and allocated portion of indirect) goes into COGS (cost of good sold) and cannot be deducted until the corresponding property is sold. He can deduct some overhead costs not attributable to specific properties.

He has a very significant problem to watch for. He absolutely must keep the two businesses separate. If they are commingled, he will run a risk of losing capital gain treatment when he sells his rentals.