Discussion:Trying to house flip

Should there be a Schedule C or a partnership, LLC? How would the expenses (materials, taxes, etc.) be divided? If and when they sell it would the capital gains be divided equally? Any advice will be appreciated. This may be a little to complicated for my small practice. Thanks.

You just advised someone to advise their client to break the tax laws by letting an LLC to go dormant via the non-filing of returns and ignoring of notices. Just because "re developers" may do this, a tax advisor should not be suggesting this as a course of action. I would hope that Tsponhour ignores this suggestion when advising his / her client.

If the client forms an LLC, then all fees should be paid, all required returns should be filed and for a tax advisor (attorney, CPA, EA, certified tax preparer or any other paid preparer) to suggest otherwise to a client is not only unethical, it opens the advisor up to malpractice claims.

Additionally, a SMLLC with an individual as the SM rarely provides the legal protection people think it does. For example, if the individual SM caused the environmental damage (Tsponhour's client "supplied mostly labor"), then the LLC will provide him no protection whatsoever.

There really is not enough information given to answer your question. Is this one of many flips the client has done with his brother-in-law and sister and this is merely the latest one? Are the properties being held for investment purposes? (Constant flipping does not constitute an investment purpose.) If so, then they very well may have a trade / business (depending upon the exact facts & circumstances) and have a de facto partnership.

If this was the first attempt, then they may not / probably do not have a de facto partnership and Schedule D treatment is probably correct.

I believe you will want to look at §761 and research materials related to the same:

BEGIN CITE

§761(a) Partnership. For purposes of this subtitle, the term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate. Under regulations the Secretary may, at the election of all the members of an unincorporated organization, exclude such organization from the application of all or part of this subchapter, if it is availed of—

(1) for investment purposes only and not for the active conduct of a business, (2) for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted, or (3) by dealers in securities for a short period for the purpose of underwriting, selling, or distributing a particular issue of securities,

if the income of the members of the organization may be adequately determined without the computation of partnership taxable income.

END CITE

As you can see, there is sufficient room for various facts & circumstances to make the answer fall one way or another. You need to determine the exact facts & circumstances of your client's situation and then make a determination.

I would gather all the information I could and then talk to some local tax advisors that have experience in this area. Posting one paragraph in TaxAlmanac and trusting any of the answers (including mine) without further research on your part would be a mistake (in my opinion).

If it is not worth your time (meaning either the client is not willing to pay you for the research or you aren't willing to do the research without getting paid) then you have to determine whether you want to take on the risk of signing a return for which you have low confidence on how everything is being reported.

(joke)

After a couple of years, the state deactivates the LLC unilaterally and to get it back, a "revival" process must be gone through.

All federal and state income tax returns need to continue to be filed.