Discussion:Self Employment Loss vs. Capital Loss
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Karendhill (talk|edits) said: | 22 October 2006 |
| My husband and I purchased a home in January of 2006 for the purpose of remodeling it and selling it for a profit. (We did not live in this home). My husband and his two sons did most of the work, except for the laying of the carpet. We made extensive repairs to the plumbing and electrical as well as totally remodeling the two bathrooms and installing desert landscaping in the front yard. We also paid his two sons for their work. The house was on the market for several months and finally sold yielding us about a $20,000 loss. (Ouch!)
My question is this, is there any way to show a loss on schedule C for some of these expenses -or is it strictly a capital loss? Thanks. | |
Karendhill (talk|edits) said: | 22 October 2006 |
| My husband has a handyman business. Does this qualify for being in business then? | |
Karendhill (talk|edits) said: | 22 October 2006 |
| Yes, 2006 will be the first year that he has the handyman business and files Schedule C and he will have a few thousand dollars in gross income. He advertises and has business cards too. | |
| 23 October 2006 | |
| Just curios... if it were sold at a gain of $20k were you planning on reporting it as ordinary income? | |
| 23 October 2006 | |
| The distinction between investment and business is one of facts and circumstances and in this case I would guess the short period of holding the asset (not held for appreciation), the significant improvements made and the fact that the person is a professional remodeler (i.e. handyman) indicate ordinary income/loss.
The only missing factor is frequency of sales, but everybody has to have a first sale. As the facts exist, I would feel fine putting this loss on Schedule C. (Any gains on future projects would then be subject to the same treatment). Further, the court cases I’ve reviewed, when researching this issue for home flippers, all find that where there is a significant level of improvement, income/loss is ordinary. Investment (capital gain) status is only maintained where minimal improvements have been made only to facilitate the sale of the property. | |
| 23 October 2006 | |
| Wamark - How about giving us a couple of the cases that can be referenced. | |
| 23 October 2006 | |
| I'm wondering how/whether you would generally show the purchase and sale of real estate for a handyman on a Schedule C. Since Schedule C is subject to SE tax by definition.
If you're going to actively flip more properties, it seems you might want some entity to do it for liability reasons. Just in case the site goes toxic on you or something. | |
| 23 October 2006 | |
| Hi Solomon,
Well, I don’t have them at the ready, but I think the big one that all of this is based on is Beidenharm Realty (aka the Winthrop factors). Although, it more directly applies to land developers, it also establishes the "primary purpose the property was held" as referred to in IRC 1221 (a)(1). Section 1221a1: Property held by TP primarily for sale to customers in the ordinary course of trade/business. One of the factors is substantial improvements (frequency of sales is the other big one). The rest of the cases I found that were more specific to remodeler’s and builder’s were mostly tax court cases. Where significant improvements were made I could not find a single exception to base a position on for capital gains over ordinary income. Unfortunately, that was sometime ago and I don’t have a cite. Sorry. Frankly, I would like to be wrong on this. Do you have any case cites to the contrary? Anything I can hang my hat on? | |
| 23 October 2006 | |
| No I don't. In this case I would be most concerned about frequency. Granted, it does require a first sale; nevertheless, if there were no plans by the taxpayer to do this with regularity, I would nix Sch C. Especially in view of the 20k loss - I would think that would temper any future plans. | |
Death&Taxes (talk|edits) said: | 24 October 2006 |
| What I wonder about is the tax the sons paid, their ages, social security paid and the like. I would hope not too much of the potential savings went out the window with their taxes. | |
| 24 October 2006 | |
| agree with Solomon
spitballing in extrapolation... You don't need a position for capital treatment. It is a capital asset. You need a position for ordinary treatment. I don't think substantial improvements matters. Maybe in some fact situations, but not here. I think primary purpose only matters once you have a trade or business. Remember, once you have a trade or business, you need a position to argue capital, not ordinary. If you have a trade or business it's ordinary by definition. Inventory. Thus once you have a trade or business, you need to set aside for long term hold and identify as such on corporate books to receive capital treatment. I'm not so squeemish with a first year loss. Happens with any business. But as you said, trade or business is facts and circumstances. So only you can tell. I think you need good facts to rise to a level of trade or business here. I don't think you get there unless you are in the position to be regularly engaged in taking title to property. Building inventory. Greater frequency. Are you capitalized to pursue multiple properties at once? Are there other deals happening? | |
| 24 October 2006 | |
| Enjoying the discussion.
Was going to respond with some more back up, but when I googled Winthrop factors, I found the attached article that I think very cogently addresses the issue at hand. So rather than spew on about the subject, I’ll put it here for yours and more importantly KarendHill’s benefit. http://www.taxresourcegroup.com/library/memo/1326.html Clearly not a black and white call. Both my point and Solomon’s point are addressed in the article. Gzeweig, Your comment: “You don't need a position for capital treatment. It is a capital asset.” is not quite accurate. Primary authority for the definition of a capital asset can be found in code section 1221 and the Biedenharn case. Whether or not this is a capital asset is at the heart of the issue we are discussing here. It can only be determined by the facts and circumstance at hand. There is nothing inherent in this asset that makes it a capital asset. My allotment of time for cyberloafing this week is all used up. I have to go make some money. See ya. | |
| 24 October 2006 | |
| Not quite accurate is debateable, but that link doesn't differ much at all from what I was saying. Those 8 factors get analyzed to determine whether there is a T/B of selling property. Of course, it's a capital asset. All assets are unless they are excepted in the 1221 flush language (notes, depreciable T/B property). Ignoring the exceptions not applicable here, it's a capital asset unless it's stock in trade, or inventory. One sale is not a T/B and I don't see risk of the IRS saying ordinary in a one time sale scenario. | |
