Question about how Gross income should be reported on a flipping business...

[Faiz Kanash]

Hopefully this doesn't sound more complex than I need it to be. I recently had my taxes filed with a new CPA, and i'm not 100% certain if my taxes were filed correctly. Im a fix n flipper, and this is my first year reporting income from the business to the tax man and I don't want my taxes to have been reported incorrectly for fear of future issues should they arise. 

The main problem I noticed was how much was reported as gross, which seems much lower than what I anticipated. Without getting too deep into my own personal financials, ill create a quick scenario. 

(This is filing for a s-corp) My gross was reported as 130k on my taxes(Not actually), however, when I've sold the properties i've received 2 checks of 200k and 300k that were deposited into my bank. These checks are after all closing fees and the remaining mortgages were paid off, meaning it's my profit. Deductions would be the original deposit I had put into the property, material and labor, and all other deductions such as utilities. Lets say my total profit for the year after all deductions come out to 100k. 

Would the gross amount on my taxes have to be $500k because of the large checks I've received, then apply the deductions to that amount? Or, is it based off of the total profit from the house flips before deductions, which is what I believe my CPA had done? Also, my CPA filed the income as 'short-term capital gains', and after a bit of research i've seen that my income was suppose to be reported as standard income, or is that not a big deal? I want to ensure my taxes are solid, since I would like to be able to qualify for a traditional mortgage next year rather than continuing to work with hard money lenders due to the rather high interest rates I deal with(I still make it work, but of course more profit to be made with a conventional mortgage).

Thank you!

[Bill Hampton]

Quote from @Faiz Kanash:

Hopefully this doesn't sound more complex than I need it to be. I recently had my taxes filed with a new CPA, and i'm not 100% certain if my taxes were filed correctly. Im a fix n flipper, and this is my first year reporting income from the business to the tax man and I don't want my taxes to have been reported incorrectly for fear of future issues should they arise. 

The main problem I noticed was how much was reported as gross, which seems much lower than what I anticipated. Without getting too deep into my own personal financials, ill create a quick scenario. 

(This is filing for a s-corp) My gross was reported as 130k on my taxes(Not actually), however, when I've sold the properties i've received 2 checks of 200k and 300k that were deposited into my bank. These checks are after all closing fees and the remaining mortgages were paid off, meaning it's my profit. Deductions would be the original deposit I had put into the property, material and labor, and all other deductions such as utilities. Lets say my total profit for the year after all deductions come out to 100k. 

Would the gross amount on my taxes have to be $500k because of the large checks I've received, then apply the deductions to that amount? Or, is it based off of the total profit from the house flips before deductions, which is what I believe my CPA had done? Also, my CPA filed the income as 'short-term capital gains', and after a bit of research i've seen that my income was suppose to be reported as standard income, or is that not a big deal? I want to ensure my taxes are solid, since I would like to be able to qualify for a traditional mortgage next year rather than continuing to work with hard money lenders due to the rather high interest rates I deal with(I still make it work, but of course more profit to be made with a conventional mortgage).

Thank you!

Flipping is considered ordinary income. Find an accountant that specializes in real estate taxation and amend your return if it has already been filed. If it hasn't been filed, don't submit it and get a second opinion. 

Good luck in your search. 

[Faiz Kanash]

Quote from @Bill Hampton:

Quote from @Faiz Kanash:

Hopefully this doesn't sound more complex than I need it to be. I recently had my taxes filed with a new CPA, and i'm not 100% certain if my taxes were filed correctly. Im a fix n flipper, and this is my first year reporting income from the business to the tax man and I don't want my taxes to have been reported incorrectly for fear of future issues should they arise. 

The main problem I noticed was how much was reported as gross, which seems much lower than what I anticipated. Without getting too deep into my own personal financials, ill create a quick scenario. 

(This is filing for a s-corp) My gross was reported as 130k on my taxes(Not actually), however, when I've sold the properties i've received 2 checks of 200k and 300k that were deposited into my bank. These checks are after all closing fees and the remaining mortgages were paid off, meaning it's my profit. Deductions would be the original deposit I had put into the property, material and labor, and all other deductions such as utilities. Lets say my total profit for the year after all deductions come out to 100k. 

Would the gross amount on my taxes have to be $500k because of the large checks I've received, then apply the deductions to that amount? Or, is it based off of the total profit from the house flips before deductions, which is what I believe my CPA had done? Also, my CPA filed the income as 'short-term capital gains', and after a bit of research i've seen that my income was suppose to be reported as standard income, or is that not a big deal? I want to ensure my taxes are solid, since I would like to be able to qualify for a traditional mortgage next year rather than continuing to work with hard money lenders due to the rather high interest rates I deal with(I still make it work, but of course more profit to be made with a conventional mortgage).

Thank you!

Flipping is considered ordinary income. Find an accountant that specializes in real estate taxation and amend your return if it has already been filed. If it hasn't been filed, don't submit it and get a second opinion. 

Good luck in your search. 

 Thank you!

[Faiz Kanash]

Quote from @Bill Hampton:

Flipping is considered ordinary income. Find an accountant that specializes in real estate taxation and amend your return if it has already been filed. If it hasn't been filed, don't submit it and get a second opinion. 

Good luck in your search. 

Are you able to answer my question about the gross part? Do you know if my CPA reported the gross correctly? Or, is my gross on my taxes suppose to represent the total amount I deposited via checks?

[Chris Seveney]

@Bill Hampton

Not a cpa

But you should have a profit and loss statement that shows all your profits and losses. The net is what would be recorded as income

If you sold a property for $300k but paid $200j + $50k in interest your profit is $50k

Not $300k

[Faiz Kanash]

Quote from @Chris Seveney:

@Bill Hampton

Not a cpa

But you should have a profit and loss statement that shows all your profits and losses. The net is what would be recorded as income

If you sold a property for $300k but paid $200j + $50k in interest your profit is $50k

Not $300k

 So in my scenario, say I deposited a check in the bank for $200k after closing but realistically only $50k of that is actually profit. Do I report that 200k as the gross amount on my taxes, or is it the 50k I report as the gross?

[Chris Seveney]

Quote from @Faiz Kanash:

Quote from @Chris Seveney:

@Bill Hampton

Not a cpa

But you should have a profit and loss statement that shows all your profits and losses. The net is what would be recorded as income

If you sold a property for $300k but paid $200j + $50k in interest your profit is $50k

Not $300k

 So in my scenario, say I deposited a check in the bank for $200k after closing but realistically only $50k of that is actually profit. Do I report that 200k as the gross amount on my taxes, or is it the 50k I report as the gross?

 Talk to your accountant is what you need to do. It should be the $50k but there are a lot of factors

[Bill Hampton]

@Faiz Kanash

Flipping Is ordinary income, not capital gains. 

If you are not comfortable with your accountant or how he is preparing/explaining your return, you may need a new accountant. 

Advice on this forum is not a substitute for hiring an accountant that specializes in real estate taxation. 

File an extension and work with an accountant that specializes in real estate taxation after April 15th. 

Good luck. 

[Max Emory]

Hey @Faiz Kanash, having a great REI-savvy bookkeeper would fix this issue pretty quickly. You need a complete and accurate income statement (profit & loss).

Your "gross income" for flips will be what each property was sold for (top line). Your "gross profit" for flips is going to be what the property sold for minus all Cost of Goods Sold for the property (purchase, closing costs, renovations, holding costs, selling costs, etc). 

From there, you'll deduct all of your other business expenses that are not property-specific. And, you may have some "other income" and "other expense" transactions to consider as well (bottom of profit & loss). 

Then, the remaining number is your net income which you will be taxed on (bottom line).

Totallly agree with @Bill Hampton. You need to get a second opinion on your tax return.

And, I highly suggest hiring an REI-savvy bookkeeping firm to keep your bookkeeping records up-to-date and accurate. They will also be instrumental in catching errors within your tax return. We catch errors all the time made by our Clients' tax professionals in the REI space.

[Basit Siddiqi]

Your gross income is the total amount of proceeds that you received from all the sales which is $500,000.
You then have 'inventory' which is the cost of the purchase price of properties, rehab, materials, etc that went into the properties.

You then have overhead costs such as driving to the properties, LLC Fees, etc which are expenses and then bring you do your net income.

[Mike Klarman]

I like to tell people that if you plan to be an investor who is flipping and holding all the time, on your flips just set aside 40% of the profit to be safe.  Of course write off whatever you can when the time comes and I do not know the ins and outs of what can be written off on a short term investment.  I know the capital gains tax on investments shorter than 1 year have at least 35%+ tax.

I try to tell people to beat the tax with volume, the 1031 exchange program can be a pain with their guidelines and process.  But if you were able to flip 4 houses per year and you netted 25k in each one then it's still 100k in free cash flow for the year.  You need that capital to fund the portfolio.