Schedule C vs Schedule D

[quicksam]

I have a Real Estate Sales Woman who bought a couple of houses last year and renovated and sold.

At what point would I change this type of investment from Schedule D income to filing on a Schedule C as employment income.

Looks like she is planning on doing one or two a year as an investment.

[Peachie]

Doesn't sound like

Schedule C income at all. I thought you said these were for investment purposes. Doesn't appear to have a Schedule C motive. Seems like short term/long term sales, so a schedule D seems in order. Of course, the more learned professionals will come along and make me wiser and smarter. That's just fine with me :-)).

[joanmcq]

If she is doing this regularly, this is a trade or business, the houses are inventory and it goes on a C.

[DaveO]

An auditors view.

A while ago I posed this same question to a local IRS auditor in casual conversation. I had a client doing the same thing. I asked him at what point the buying, rehabbing and flipping of homes would move from "D" to "C". His answer was 3 in a year, which surpised me since my clinet was otherwise working part time in real estate. I would have thought 1 or 2 a year for 2 or more years would surely be a trade or business. Bear in mind this is one auditors opinion, not IRS guidence.

[JoshinNC]

I think circumstances would dictate what is a "business" or "investment"

For example:

A firefighter who works 2000 hours per year at the firestation and also buys and refurbishes 10 houses per year is making an investment. No different than if he went home everyday and spent 3-4 hours trading stock on E-Trade.

By contrast, a retired firefighter who has no other job and spends 20-30 hours per week buying and refurbishing houses is carrying on a business.

Just my opinion, and I'm not even an auditor.

[Jesse]

For example:

A firefighter who works 2000 hours per year at the firestation and also buys and refurbishes 10 houses per year is making an investment. No different than if he went home everyday and spent 3-4 hours trading stock on E-Trade.

By contrast, a retired firefighter who has no other job and spends 20-30 hours per week buying and refurbishing houses is carrying on a business.

Just my opinion, and I'm not even an auditor.

I do believe facts and circumstances will dictate, but it is different than spending 3-4 hours trading stock on E-trade because you are physicaly buying materials and fixing up houses for a profit.

Is it any different than me spending 60 hours in a week doing tax returns vs. my neighbor who is only doing them 4 hours a night after her hectic teaching job just because she's trying to make ends meet(sarcastic smile)?

I would think more than 1 a year and even 1 year after year w/ a profit motive would be schedule C. Three a year surprises me - but I think it would depend also how much work you put into a home to sell it would also come into play in determining if it was an investment bought for resale or a a sale subject to SE tax.

Just my tired opinion.

[Burke]

I don't know where he came up with the 3-a-year rule, but there is no such rule. Frankly, a real estate agent (or anyone else for that matter) who buys properties, then either subdivides the land into lots for resale, or rehabs the buildings for resale, has just become a "dealer" and it is a Sche C business with the properties treated as inventory, with sales as ordinary income, no matter the holding period. As each lot or bldg is sold, the basis of that portion is treated as cost of goods sold. This is quite different from buying land and holding for investment purposes. The only exception would be if the buyer moved into the property, making it her principal residence, and kept it for the required period. For the land subdivided into lots, it would have to meet special circumstances under Sect. 1237.

[newbie]

I have a Real Estate Sales Woman who bought a couple of houses last year and renovated and sold.

At what point would I change this type of investment from Schedule D income to filing on a Schedule C as employment income.

Looks like she is planning on doing one or two a year as an investment.

After the first home is sold and she is on to the second home I would seriously think about sched C. Like joanmcq pointed out she is now buying inventory.

[geekgirldany]

My brother does this and is actually a fireman I encountered a situation like this and asked him what his accountant had told him. He said he was told to hold the properties for 5 years and then sell them. Then it would be considered an investment.

An investment is meant to be long term. Atleast longer than a year. I think to prove your case holding a property for 3 to 5 years is a good length. Then these properties can be reported on Schedule D.

I had a customer and there is probably a post on here about it called "flipping houses". I told him about this and it would be considered business. The tax consequences. I suppose he found someone who told him different because he did not come back to me.

[myerstaxes]

Fire Fighters Like this!

I have a retired fire fighter who is doing this...After the first one, I told him that he would be a C since he told me he had purchased another...

[Auto]

Schedule C

I have a client who does this as well. It is called flipping houses. Of course in this market not much flipping is being done. Some she ended up renting, others are rent with option to buy. I don't think she's sold one yet. Costs for the purchases and repairs are in an inventory account. The ones turned into rental property recognizes rental income, expenses and depreciation.

[Lion]

Renovating Houses

She's renovating houses. That's a business. If she bought and held, waiting for the local markets to rise, that's investment property. Now, there's a gray area between the two, so you're closer to her situation to look at the facts and circumstances. Explain the difference between investment and business to her and the consequences of the IRS disagreeing with her, and let her make the call.

[JoshinNC]

I don't agree with the arbitrary holding periods

listed in other posts. What would be the purpose of STCG if an investment had to be held for 2, 3 or 5 years to qualify as an investment? I would qualify any real estate activity that did not meet the real estate professional rules as an investment.

[Jesse]

listed in other posts. What would be the purpose of STCG if an investment had to be held for 2, 3 or 5 years to qualify as an investment? I would qualify any real estate activity that did not meet the real estate professional rules as an investment.

It's not just the holding periods. If you buy a house like stocks or bonds anticipating an increase in value you are investing in a capital asset. If you buy a house and put money, time, labor into the project you are doing much more than just anticipating an increase in value. You have a profit motive.

Why would working on real estate for a profit motive be any different than any other SE income?

[JoshinNC]

Can you not have a profit motive in rental real estate?

It's not just the holding periods. If you buy a house like stocks or bonds anticipating an increase in value you are investing in a capital asset. If you buy a house and put money, time, labor into the project you are doing much more than just anticipating an increase in value. You have a profit motive.

Why would working on real estate for a profit motive be any different than any other SE income?

That is not SE income, unless it can be proven that you are a real estate professional. Explain the difference.