sale of home

[TAX]

Client bought a house in 2006, fixed it and then sold in 2007

No rental. Investment only.

Can I report on Sch D showing sale price and cost. Also can I add all cost such as closing costs, repair etc to purchase price?

Thanks!

[Burke]

Flipping houses is a business, Sche C and SE tax treatment.

[Lion]

And, Inventory

And, inventory for the house.

[stern100]

sch d

one investment in real property goes on sch d on my returns.

[Burke]

Pertinent info in original post is "fixed it." Bought and improved for resale.

[taxladyea]

"flipping houses"

is a business when you are going to repeatedly continue to do this. When you just run across a good buy, fix it up and sale THAT is NOT a business but an investment and goes on schedule D.

[Bees Knees]

is a business when you are going to repeatedly continue to do this. When you just run across a good buy, fix it up and sale THAT is NOT a business but an investment and goes on schedule D.

Maybe yes, maybe no.

If I go to Wal-Mart for one day and smile at people and earn $30, then decide never to do that again, does that turn my W-2 wage into investment income?

I think the "continue to do this" criteria is way over blown. Flipping houses require a great deal of labor in order to earn a profit. When personal services are an important income producing factor, that is a business, even if it is only done once. The frequency of doing an activity is only one small part of the equation.

And don’t bother quoting me the court case where a one time window washer got away with not reporting the income as SE income because he was never going to do it again. Those judges were high on drugs when they came up with that ridiculous ruling.

[Larmil]

Intent & extent of labor

Maybe yes, maybe no.

If I go to Wal-Mart for one day and smile at people and earn $30, then decide never to do that again, does that turn my W-2 wage into investment income?

I think the "continue to do this" criteria is way over blown. Flipping houses require a great deal of labor in order to earn a profit. When personal services are an important income producing factor, that is a business, even if it is only done once. The frequency of doing an activity is only one small part of the equation.

And don’t bother quoting me the court case where a one time window washer got away with not reporting the income as SE income because he was never going to do it again. Those judges were high on drugs when they came up with that ridiculous ruling.

I believe that the intent and extent of labor enter into the decision. I once had a client who purchased a house in a distress situation on the part of the sellers. The client's INTENT was to sell it at a profit. The only LABOR was replacing a storm door. He sold the house 30 days later at a 10,000 profit. I believe I was correct in reporting the sale as a short term capital gain on Sched D.

[Bees Knees]

The only LABOR was replacing a storm door. He sold the house 30 days later at a 10,000 profit.

Obviously the 10,000 profit was not due to replacing a storm door.

I think there is a big difference between buying low and selling high vs. going in and spending 4 months breaking your back to get the house ready for sale.

[TAX]

This client is not in the business of buying, fixing, & selling. He just did it on time in 40 years. So I put it on Sch D

Thanks!

[Bees Knees]

This client is not in the business of buying, fixing, & selling. He just did it on time in 40 years. So I put it on Sch D

I think that is what we are arguing about. You say your client is not in the business of buying, fixing, and selling flip houses. Yet your client bought, fixed, and sold a flip house. How does that turn the value of his personal labor into capital gain?

A word of caution. TTB page 5-23 cites this court case:

Court Case: The courts have ruled that an activity subject to SE tax must
be regular and continuous. A taxpayer was not liable for SE tax for doing
a one-time window installation job where he had never performed
that kind of service before, nor did he ever again at any time thereafter.
(Batok, Tax Court Memo, Dec. 28, 1992)

Never mind the stupidity of the judges when they decided that case. What happened to the income? Did it get to go on Schedule D, because he was not in the business of installing windows?

No, it was still considered ordinary income. It simply was not subject to SE tax. You have to be careful when you use one obscure court case that boarders on insanity to justify a completely different code section that was never addressed in the decision. You might be able to argue the gain attributed to his personal efforts in flipping the house is not subject to SE tax, using this court case as a citation. That doesn’t necessarily mean it should also receive capital gain treatment.

[Jesse]

I think that is what we are arguing about. You say your client is not in the business of buying, fixing, and selling flip houses. Yet your client bought, fixed, and sold a flip house. How does that turn the value of his personal labor into capital gain?

A word of caution. TTB page 5-23 cites this court case:



Never mind the stupidity of the judges when they decided that case. What happened to the income? Did it get to go on Schedule D, because he was not in the business of installing windows?

No, it was still considered ordinary income. It simply was not subject to SE tax. You have to be careful when you use one obscure court case that boarders on insanity to justify a completely different code section that was never addressed in the decision. You might be able to argue the gain attributed to his personal efforts in flipping the house is not subject to SE tax, using this court case as a citation. That doesn’t necessarily mean it should also receive capital gain treatment.

I think that is an excellent observation Bees.

I think if he bought it with the intent of "fixing it up" he has a profit motive and he is doing more than "just" investing money in an asset that he is planning to turn around and sell for more than what he purchased it for. By adding labor, money and doing physical work or playing general contractor you are not just making an investment.

If you argue a one time deal this year and he does it again would you go back and amend?

[TAX]

I think that is what we are arguing about. You say your client is not in the business of buying, fixing, and selling flip houses. Yet your client bought, fixed, and sold a flip house. How does that turn the value of his personal labor into capital gain?

A word of caution. TTB page 5-23 cites this court case:



Never mind the stupidity of the judges when they decided that case. What happened to the income? Did it get to go on Schedule D, because he was not in the business of installing windows?

No, it was still considered ordinary income. It simply was not subject to SE tax. You have to be careful when you use one obscure court case that boarders on insanity to justify a completely different code section that was never addressed in the decision. You might be able to argue the gain attributed to his personal efforts in flipping the house is not subject to SE tax, using this court case as a citation. That doesn’t necessarily mean it should also receive capital gain treatment.

Bees: Good point. Thank you! I will be careful when doing this return.