Rehab Reporting
Hello,
I'm hoping DaveT is listening...
I bought a house in March 2002 for rehabbing, completed and sold it March 2003 just short of a year.
I bought a house in June 03, and it will be wrapping up soon.
My intention was to rehab and sell, and I understand this is not an investment property and will be reported on Schedule C. (Or rather 1065, since it is a project with my wife? We are not a community property state.)
But my question is: How and where on the schedule or other tax form is it reported? I'm sorry if this seems too basic or silly, but this is my first year to report this.
I was thinking in the "Cost of Goods Sold" section, but got confused by IRS Publication 538, page 23: "Do not include the following in inventory: ... Real estate held for sale by a real estate dealer in the ordinary course of business."
Thank you in advance,
Brian
Minneapolis
If you are married filing a joint return AND are not operating from within a LLC treated as a partnership, I would not bother with Form 1065. Use Schedule C instead.
I am a buy and hold guy (Schedule E), and do not operate a Schedule C activity. With this caveat, I suggest the following for your Schedule C. Bear in mind that the following is just my opinion, and not tax advice.
For your situation, I would fill in lines 35 though 41 as follows:Line 35, Inventory at Beginning of Year. Enter $0.
Line 36, Purchases Less Cost of Items Withdrawn for Personal Use. Enter purchase price of house acquired in March 2002.
Line 37, Cost of Labor. Enter the labor cost you paid out of pocket for the rehab on the property reflected on Line 36.
Line 38, Materials and Supplies. Enter the cost of materials and supplies for your rehab on the property reflected on Line 36.
Line 39, Other Costs. Enter your overhead expenses. Overhead expenses include expenses such as heat, light, power, insurance, property taxes, maintenance and upkeep for the rehab property reflect on Line 36.
Line 40, Add Lines 35 through 39.
The total of lines 35 through 39 equals the cost of the goods available for sale during the year.
Line 41, Inventory at End of Year. Enter zero. Property you acquire but have not sold during the year is not expensed as inventory on hand, but instead is recognized in your cost of goods sold calculations in the year of sale. Do not enter the property you acquired in June 2003 as inventory on hand. Wait until you actually sell the property, then calculate your cost of goods sold as you did for the March 2002 property.
Line 42, Cost of Goods Sold. When you subtract your closing inventory (Line 41) from the cost of goods available for sale (Line 40), the remainder is your cost of goods sold during the tax year. This should reflect your profits from each sold rehab during the tax year.Remember to use your net income from Schedule C to calculate your self-employment income taxes on Schedule SE.
For more information, refer to IRS Publication 334. For specific details, consult a professional tax advisor licensed in your state.[ Edited by DaveT on Date 03/17/2004 ]
DaveT,
What an informative and complete answer. Thank you very much.
I would love to skip the 1065, but as I read IRS Publication 334 and 541, it seems that I must do the extra paperwork since my wife and I are definitely in this together, both swinging hammers and and sharing profits.
Does anyone have any experience with this? It seems like a lot of extra paperwork that will all end up with the same tax obligations. Maybe I missed something here.
Thanks again, DaveT.
Brian
Minneapolis
It appears that you are correct. I did not unerstand from your previous postings that you and your wife jointly own the business. Because of your joint ownership, you must file a partnership tax return.
Only if you are the sole owner (your wife can work as an unpaid assistant), can you pass Form 1065 and go directly to Schedule C.
DaveT,
Thank you so much. I have been trying to figure this out on and off for months, and was not getting very far with the IRS Publications.
Best,
Brian
Minneapolis