Wholesaler's income tax question - Posted by Kristine-CA

Real Estate Investing Office
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Posted by Dave T on April 17, 2003 at 14:53:49:

Peter, in your post to Kristine, you chose to give an accounting lesson. But now you tell me to let her accountant earn their keep. Is it because I have a valid point that you overlooked?

Kristine did say in her original post that the property she bought and sold was not purchased for investment nor for production of income. This only leads me to conclude that her “property” is stock in trade and could be reported on Schedule C the same as one would report the costs of inventory bought and sold.

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Wholesaler’s income tax question - Posted by Kristine-CA

Posted by Kristine-CA on April 17, 2003 at 01:23:21:

Greetings everyone. Very generally speaking: can one list the purchase costs and sales costs of houses bought and sold within one year as inventory on Schedule C? I don’t think I will be doing my own taxes anymore as I’m finding it too confusing. But I’d at least like to understand how the IRS views the purchase and sale of real property–when it’s not reported as a capital gains/loss and when it is not rental or income producing property.

I understand that none of you are giving legal advice or tax advice, and yes, I have my own accountant…

Thanks for any thoughts. Sincerely, Kristine

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It doesn’t make ANY difference… - Posted by David Krulac

Posted by David Krulac on April 18, 2003 at 15:58:30:

whether you’re a dealer or not, IF you always sell your property in LESS than one year. The “penalty” for being a dealer is to pay ordinary rates, which are the same rates that you pay when you hold for less than one year. So therefore there really is no penalty, so don’t bother calling yourself a dealer.

Where this comes into play is for property held LONGER than one year. And as another poster mentioned if you’re a flipper, you shouldn’t have property longer than a year. Flipper held property loger than 1 year is a svere admission of not being a flipper, in the true sence of the word. To paraphrase “You don’t flip in slow motion.”

David Krulac
Central Pennsylvania

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Thanks everyone for the ideas. n/t - Posted by Kristine-CA

Posted by Kristine-CA on April 17, 2003 at 20:22:25:

n/t

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Re: Wholesaler’s income tax question - Posted by Dave Murray, Ohio CPA

Posted by Dave Murray, Ohio CPA on April 17, 2003 at 14:36:56:

Whether you’re a cell phone dealer, car dealer, or real estate dealer, the items you have on hand available for sale are “inventory.” If you do this individually or through a single-member LLC, you report it as Sales and Cost of Sales on Schedule C. When you’re a dealer, real estate held for sale is not a “capital asset” nor a “fixed asset” - in the same way that you may buy a pickup truck to use as a fixed asset in your real estate business, but to the car dealer it is just inventory.

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Re: Wholesaler’s income tax question - Posted by Peter_MD

Posted by Peter_MD on April 17, 2003 at 07:51:06:

Kristine-CA

Good morning?I see you posted very early this morning.

You stated, “?can one list the purchase costs and sales costs of houses bought and sold within one year as inventory on Schedule C?”

The answer is no for bought, and no for sold. Acquisition of real property is a capital investment?very basic accounting principles and tax treatment. The real property is used in a trade or business only as a place of business (for Schedule C) ? for the production of income.

I guess my confusion would be, why consider a Schedule C?

A Schedule C is a simplistic statement of Income and Expenses for a Sole Proprietorship Business. There is no place on that Schedule to list fixed assets. You only list the building in the depreciation schedule, never as an asset, inventory, to be sold for a profit?for the production of income. Assets held in inventory are held for sale in the normal course of operations of the business for the production of income. In a Schedule C, you would have fixed assets such as the building the business is housed in and furniture, fixtures, and other capital assets. When the capital asset building(s) you conduct the business in is/are sold, you subsequently report a profit or loss if you sell that/those capital assets for a profit or loss?taking into consideration depreciation taken during the normal course of business operations. IRS code sections identify the various types of real property that are held. Section 1245 would be for the building your business uses to produce income such as an office building, store, or warehouse. A Section 1250 property is rental property (this is the property you have). The income or loss for the operations of each rental investment property (a capital asset) is show on a completely different IRS form, Schedule E, income or loss from rental (or other investment) activities.

Class over. I taught accounting and taxes for nine years at the university I graduated from. Believe me, I look at things more simplistic as years go by. Remember the teachings of Robert Kiyosaki in Rich Dad Poor Dad and Cashflow Quadrant?you pay people who know this stuff to advise, consult, and do the proper things. You pay them for what they know and you make money from what you know.

Then, you say, " I don’t think I will be doing my own taxes anymore as I’m finding it too confusing."

Why in the world would you be doing your own taxes?

Next, you say, “But I’d at least like to understand how the IRS views the purchase and sale of real property–when it’s not reported as a capital gains/loss and when it is not rental or income producing property.”

IRS views the acquisition of real property as a capital investment. The acquisition of real property is mainly for those two general purposes?making a profit or loss by holding the investment for either a gain or loss, and, at the same time, for the production of income via rental activities, if the property is rented.

Lastly, you state, “I understand that none of you are giving legal advice or tax advice, and yes, I have my own accountant…”.

Good, ask these questions to your accountant and quiz them over and over about the accounting and tax treatment of capital investments in real property until you have a good basic understanding of the concepts. If you don’t get the “comfort level” you would expect from the answers provided, consider looking for a replacement.

The best to you…

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Re: Wholesaler’s income tax question - Posted by BrokerScott (Mich)

Posted by BrokerScott (Mich) on April 17, 2003 at 06:12:21:

Depends on your coporate structure. If memory serves, you can do that with a “S” corp, but really not sure about the rules for others since I buy and hold anyway. Really need to see your accountant and maybe your lawyer about changing or adding another corporation. Best, Scott

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Re: Wholesaler’s income tax question - Posted by Stacy (AZ)

Posted by Stacy (AZ) on April 17, 2003 at 01:51:02:

Kristine, I’ll leave the tax advice for someone else. But, I did want to let you know that your return was due YESTERDAY.

(grin)

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Re: It doesn’t make ANY difference… - Posted by Kristine-CA

Posted by Kristine-CA on April 18, 2003 at 16:58:07:

David: thanks for your reply. I want to understand what you are saying. Is it basically, that if one sells property in less than a year, the property is considered inventory and should be listed as such for tax purposes?

Interesting point regarding that the rates are the same, regardless of which way income is reported. But it seems to me that since I am running a real estate business, I want to deduct all the expenses of running a business, not just the expenses to specific to buying and selling particular properties. Hence, the need for the schedule C.

We’ll see what my CPA thinks…but I like to have lots of ideas to review when I get there. I’m often surprised at how I’ve read or heard about something the account, lawyer, doctor, etc. hasn’t.

I don’t flip in slow motion…I can’t afford it. Yet.

Sincerely, Kristine

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Re: Wholesaler’s income tax question - Posted by Kristine-CA

Posted by Kristine-CA on April 17, 2003 at 20:28:44:

David: thanks for your reply. This was my thinking–that I’m a dealer. But I guess I’ll have to ask my accountant lots of questions go figure out if there is a different way.

I don’t see how I can be anything but a dealer as I don’t even own them but for a few minutes. Of all the things I bought and sold last year, I have only one item remaining in the inventory. And the costs associated with the deals are property specific, not the general cost of doing business, etc.

Are there any negatives to being a dealer rather than owning property as a capital asset?

Sincerely, Kristine

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Re: Wholesaler’s income tax question - Posted by Dave T

Posted by Dave T on April 17, 2003 at 11:28:05:

Peter,

Wouldn’t Kristine correctly use schedule C for all her flipping activity when the property is considered “stock in trade”, as in a dealer disposition(s)? Let’s assume for the context of this question that Kristine is doing this under a sole proprietorship, or within a disregarded LLC entity.

In this case, wouldn’t each property purchased (with the attendant settlement costs) be reported under cost of goods purchased, and, wouldn’t each property sold (with the attendant selling costs) be reported under cost of goods sold?

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It DOES make a difference… - Posted by Diane (TX)

Posted by Diane (TX) on April 19, 2003 at 11:56:19:

Kristine - Your understanding is correct, and that’s how I’d account for it on a Schedule C.

David’s point is that short-term capital gain rates are the same as ordinary income rates. That’s true, but there are other considerations, as you point out. For example, you can expense business property, deduct for the business use of your home, etc… Also, this is self-employment income, subject to self-employment tax of 15.3%. You can reduce the SE tax hit by forming an S corporation. Read John Hyre’s articles on this site on dealer tax treatment and also on choice of entity for more info.

You’re right to use a CPA - but you’re also right to be informed. You’re the one who cares the most about your money. Trust, but verify.

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Re: It doesn’t make ANY difference… - Posted by David Krulac

Posted by David Krulac on April 19, 2003 at 09:17:16:

you can list expenses on schedule D related to the property and that would include advertising, and legal fees, commissions, and transportation. Schedule C might be better to deduct things like xerox machine, fax machine, and other expenses not linked to one specific property.

Since short term capital gains and dealer profits are taxed at the same rate, to me it doesn’t make a lot of difference. However, if you do both short term activities and long term activiities, such as rentals, you may want to seperate the endevours into different entities.

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Re: Wholesaler’s income tax question - Posted by Peter_MD

Posted by Peter_MD on April 17, 2003 at 11:53:37:

Dave T (AKA j@nospam.com):

I don’t usually respond to any emails from a fake address.

Let her “accountant” be her guide…

…as she said in her original email message, she was not necessarily looking for legal or accounting advice.

…of course the “unofficial answer” is … it depends, but I still like to use trusts and corporations for asset protection and secrecy from those who would wish to cause legal harm to me and my personal (unprotected) assets. Anyway, insurance in any form, is getting outrageous. Several clients have made storm related claims and have had their credit reports pulled and now are faced with deciding if they want to look for another insurance company or pay the double or triple premium increase for this year just because they had a claim. They realized that a larger deductible would have saved them some premiums last year and negated the hefty increase in future premiums.

…but I digress…let her accountant earn their keep.