How do I record the sale of a house that I flipped? Looking for info on how to enter the sale, account for COGS, and get the asset off my balance sheet

[KristinaK]

First, you will need to determine if you are a real estate investor or a real estate dealer.

Generally speaking, real estate investors purchase real estate with the intention of holding their properties and gaining a financial return; real estate dealers buy and sell real estate as part of their everyday business. It all comes down to the intent behind the property purchase. Even if you originally purchased the property to hold, but ended up selling it sooner, it does not mean that you are a dealer.

If you are a real estate investor, then the "flip" will be reported as a sale of an investment asset. To report it on your tax return go to: Federal Taxes - Wages & Income - Stocks, Mutual Funds, Bonds, Other. Tell the program that you did sell investments in 2015 - then that you did not received 1099-B - select "Everything Else" - continue entering the rest of the information. This will generate gain subject to preferential capital gain rates. Or a loss will be limited to $3000 deduction against ordinary income.

If you are a real estate dealer, then you will report the "flip" on Schedule C. Sales price will be your gross income (general income in TurboTax) and basis will be your cost of goods sold. This income will be subject not only to income taxes at ordinary income tax rates, but also self-employment taxes. You will also need to upgrade your TurboTax software to Home & Business.

[ACtaxpayer]

Kristina K wrote: "If you are a real estate dealer, then you will report the "flip" on Schedule C. Sales price will be your gross income (general income in TurboTax) and basis will be your cost of goods sold."  Can someone please provide more help regarding how to complete the cost of goods sold section on Schedule C?  I bought the property in September 2018, had expenses and renovation costs in both 2018 and 2019, and sold the property in July 2019.  Part III, Cost of Good Sold on Schedule C is confusing...it asks for "Inventory at beginning of year" and "Purchases" and "Inventory at end of year" and also things like "Materials and supplies" but there is also a "supplies" category in Part II of Schedule C (Expenses section).  

Please help!  I definitely want to use Schedule C to report this flip since I had a loss from it and it will offset other income I had as a realtor...which I assume will give me the leeway to use Schedule C for the flip since I'm arguably a "dealer" of sorts already plus I plan to do more flips (but at a profit next time--this was an unusual circumstance that generated a loss).  I just need to know how to complete the Cost of Goods Sold section...thank you any flippers or tax pros out there who can answer this!!

[DawnC]

 Since you sold the property in 2019, you will report all transactions related to the property (direct and indirect) in 2019, even though some of the costs were expended in 2018.  You can use the Cost of Goods Sold / Inventory account to accumulate these costs.  

The only deductions you should have taken in 2018 were general business expenses - those NOT related to the property.   You take general business expenses in the year you made the expenditure.  See examples below.  

All costs related to the property should be put in the Inventory Account which includes Cost of Goods Sold.   The purchase price paid for the property plus all of the following accumulate in the COGS - Inventory account.   Once you sell the property, record the income (sales price received) and then TurboTax will offset the related expenses/COGS for the property which will leave net gain or loss reported on Schedule C.    Your ending inventory for that property should be 0 in the year of the sale.  

House flipping is obviously a costly business, with numerous expenses incurred along the way. If you are operating as a business you may think you can find tax deductions to lower your tax obligation. Unfortunately, most of the home flipping expenses are not immediately tax deductible.  Instead, they must be capitalized into (i.e. added to) the basis (the original value) of the residence. Capitalized costs that make of the COGS include:

• The cost of the home itself
• Direct materials
• Direct labor
• Utilities
• Rent
• Indirect labor
• Equipment depreciation
• Insurance
• Production period interest
• Real estate taxes allocable to each project

You then get a tax benefit from these expenses when you sell the property as the taxable gain is reduced by the amount of basis in property (COGS account).   All of the above will make up your COGS on your tax return.   It’s important to know what expenses you can deduct when flipping a house. This will give you a better idea of how much your taxable income will be, so you can have money set aside to pay your taxes. This, in turn, affects your budget on your next flip.

Some expenses you can deduct when flipping a house include:

• Capital expenditures (expenses related to buying and renovating a house with the intention to flip). These are deducted after you flip the property.  See above.
• Vehicle expenses, which can include gas and repairs or a standard mileage rate.

• Office expenses, including rent, utilities, and office supplies like printer ink and paper
• Building permits
• Mortgage interest 

The other ''supplies'' category in Section ll refers to the general business supplies, those not specific to the property in question.  If it is an expense related to the property, it goes to COGS/Inventory account and is deducted upon the sale of the property and if it is a general business supply, it will go to the general supplies category in Section ll of your Schedule C and is deducted in the year the expenditure was made. 

@ACtaxpayer 

[Hal_Al]

@ACtaxpayer 

Simple answer: enter all your costs (one lump sum)  as inventory purchases.  This would include both 2018 and 2019 expenditures*.  When you show 0 beginning and 0 ending inventory, that will place you entire cost on lines 42 and 4, of Schedule C, as Cost of Goods Sold (COGS).  Keep your own separate detailed records of the costs.

*It would be more correct to show your 2018 expenditures as Beginning inventory and enter only your 2019 expenditures as "Purchases".   But you'll get the same result, either way.

For the future ("I'm arguably a "dealer" of sorts already plus I plan to do more flips"), you may (should) deduct "carrying costs" (insurance, utilities, real estate taxes, loan interest, mileage), directly in part II of Schedule C, each year.

[Carl]

Are you "in the business" of buying and selling houses? If so, do you buy houses, fix them up and then sell them?

Note that if you rent out the property for even one single day for any purpose, then you are "not" in the business of buying and selling houses. (At least not for that one house.)

[tagteam]

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@Carl wrote:

Note that if you rent out the property for even one single day for any purpose, then you are "not" in the business of buying and selling houses. (At least not for that one house.)

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Actually, rental of the property is irrelevant to the issue as to whether the taxpayer is in the business of buying and selling houses (i.e., whether the taxpayer is a real estate dealer):

Do not use Schedule E to report income and expenses from rentals of real estate you held for sale to customers in the ordinary course of your business as a real estate dealer. Instead, use Schedule C for those rentals.

[AmeliesUncle]

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@ACtaxpayer wrote:

 I definitely want to use Schedule C to report this flip since I had a loss from it and it will offset other income I had as a realtor

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It doesn't matter what you "want".  It is a matter of facts-and-circumstances.   If you are in the "business" of flipping homes, it goes on Schedule C.  If not (such as it is a one-time thing or only an occasional activity), then it does NOT go on Schedule C.  It would be reported as an Investment Property.

It is rather unusual that it was at a loss (even more so because you are a realtor).  Are there any extenuating circumstances involved?  Was it sold at Fair Market Value?  Those questions may change how it needs to be reported.