Discussion:Realtors and flipping houses
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Discussion Forum Index --> Tax Questions --> Realtors and flipping houses
| 5 January 2006 | |
| I have many realtors as clients. With the market as hot as it was in 2005 many of my realtor clients flipped a few homes. Since they are 'in the business' would this be classified as business income or short term capital gains? | |
Psaund9860 (talk|edits) said: | 5 January 2006 |
| I have had the same situation and have treated it as investment income and put it on Schedule "D". Never had trouble with it | |
| 5 January 2006 | |
| That is how I've handled this in the past. However in AZ this year had so many realtors flipping or holding for LTCG status. The company that I use for retirement planning was quite shocked that I treated it this way since they were 'in the business'. | |
| 5 January 2006 | |
| When primary purpose of holding real estate is appreciation in value, then the transaction is eligibile for capital treatment. Two of the primary things that the IRS (and the courts when they get involved) look at is how long the property was held and how many like transactions were entered into.
I fear too many taxpayers (possibly unknowingly) AND tax advisors (probably knowingly) are getting complacent merely because the IRS does not pick a return for audit. Less than two per hundred are picked for audit. All facts & circumstances (F&C) must be evaluated, and, if the F&C call for ordinary treatment (and the paid preparer knows it), then the paid preparer cannot sign the return without violating the tax laws and ethical standards. If the paid preparer puts his / her head in the sand and does not do the research (so as "not to know" the right result, then that is a whole other ethical issue about serving clients and signing returns. One of the cable channels has a new show, called something like "Flip That House". I watched one the other day where the person bought the house, renovated it in 11 days and sold it soon thereafter for a $170K gross profit. She has done this many times before. It may be the new version of the Wall Street Journal problem - if you see it on cable TV, then so will the IRS. | |
| 5 January 2006 | |
| I would report on Schedule D. Realtors normally do not buy and sell homes. Their clients do. Flipping a few homes as stated in the questions is far from an individual being in the business of buying and selling homes. If taxpayer is over the FICA limit the results will be very similar. IRS could overrule the Schedule C choice as this would allow a much larger SEP IRA deduction unless it is a true business. | |
| 5 January 2006 | |
| As I said in this thread and others, it is all F&C. People write a one sentence or one paragraph question. They just cannot take any response (including mine) as anything other than as a jumping off point for their own research.
Even if I give a Code / Reg cite that gives a "black and white" answer to a "black and white" question, the person who asked the question has the *obligation* as a paid preparer to look up the citation to ensure that they are in agreement. And, to put a point on it, I do not believe that this (flipping houses) is a black and white issue at all. It seems to me that time held and the number of times done are critical factors. As for the Schedule C comment, Schedule D capital gain treatment could also be agressive for taxpayers with large capital loss carryforwards. Like I said, it's all F&C. | |
Jaybird9640 (talk|edits) said: | 6 January 2006 |
| PGattoCPA is right on the money!! Too many people are complacent, I think, because the clients can be aggressivly shopping for opinions. You must be careful of these clients. They will be the first to tell the IRS you advised them incorrectly causing you penalties. In the alternative, your ability to practice under circular 230 (Title 31) could be compormised if the IRS sees enough problems. | |
| 6 January 2006 | |
| agree with pgatto one has to look at the f&c. one or two flips in a year MIGHT avoid self employment sch c reporting vs short term capital gain, then again if a realtor or anyone else is doing this every year he probably is "in the business". a realtor is probably more at risk than a "non realtor" flipping houses just due to his status of being in a related industry. dont expose yourself to penalties for the price of a tax return. | |
