A real estate flipping contract involves negotiating the purchase of real estate, and during the escrow period, selling or "flipping" the contract to another person or entity. If you flip properties on a regular basis, the Internal Revenue Service (IRS) may consider it a business, and you must report the profits on schedule C of Federal form 1040. If you flip just an occasional property and have other income, the IRS may require that you treat the income as investment income and report the proceeds on Schedule D of federal form 1040. If you treat the flipping income as business income, you will record the income or loss on the property in the year it was received.
The Correct Form and Applicable Income and Expenses
Record the income and expense as a cash-basis taxpayer on schedule C of form 1040 if you flip properties in the regular course of business. You are considered a cash-basis entity, which means you report income and expenses in the actual year received or paid. For example, if you negotiate a purchase contract for $50,000 and in escrow you sell or flip the contract to another party for $60,000, as long as you receive the $10,000 profit in 2011, you would report this on schedule C for 2011. You would also deduct any business expenses that relate to the business of flipping such as telephone expenses, appraisals, repairs or escrow costs. If you negotiated the deal in 2011, but didn't receive your flipping proceeds until 2012, then you would report the gross income in 2012. The net profit would be subject to Social Security and Medicare tax at the end of the year.
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Record an occasional flipping property contract on schedule D of federal form 1040. This form reports all capital gains income or losses. The advantage to reporting this way is that there is no Social Security or Medicare tax due on the profits. The gain or loss is also treated as a cash-basis transaction which means the income or loss on the capital gain is only recognized in the year it is actually received. Costs incurred for investment income aren't deducted as a line item but are instead used to adjust the basis for gain or loss on a transaction. For example, if you negotiate a purchase contract and you have $5,000 in costs, the $5,000 would add to the basis of the contract to reduce your potential gain from the sale when it is sold.
Record you flipping contracts just like any other business. You must keep track of all expenses that relate to the business of flipping. Expense categories are listed on schedule C and include and expenses necessary to operate your business. Contact an accountant about setting up a recordkeeping system to organize your income and expenses. Common business expenses for flipping contracts would include real estate agent commissions, escrow charges, office expenses, and telephone expenses.
Contact an accountant to determine whether you should report your flipping income as a business owner on schedule C, or as an occasional investor and report on schedule D. Multiple flipping contracts are considered like any business that sells multiple items. Each transaction is reported in the year it is actually received or spent. There may be cases in a flipping contract, where you record the flipping business expenses in one year but don’t record the flipping income until the following year.
Since a distinction must be made between a business owner or investor classification, you should contact an accountant or certified public accountant to determine the appropriate reporting method for the business.