Question about flipping properties

[jmabc]

I have a client who started a single member LLC to flip properties. In 2007, he bought 2 properties but has not sold any. He has some general expenses in setting up his office. How should I claim these expenses for 2007, on a schedule C? or am I creating a problem for future years that will preclude the client from treating the sales as capital gains income, if I show him as a property "dealer".

Thanks,

Joe

[OldJack]

I have a client who started a single member LLC to flip properties.

If you think the properties are held for investment some expenses might likely be capitalized with the property or may be investment expenses for 1040 Sch-A subject to limitation of investment income. However, they could be Sch-C expenses, it all depends.

The real question is to determine the exact status of the properties as held by the owner. You should review code 1221 [capital asset], 1231 [business asset], and 1250 [depreciable asset] as it relates to your clients property, if those code sections do not apply then it is 1040 Sch-C inventory held for resale assets. It is possible to report income and expenses as 1040 Sch-C and the sale of real estate as form 4797 [code 1231 & 1250] or 1040 Sch-D [code 1221] depending upon the property falling under which code section. I suppose it is even possible that these properties might be rental properties [code 1250 reported on form 4797] for 1040 Sch-E expenses. Just because he thinks he may flip is not the final determination of the tax status. You have to discuss the possibilities with the client and ask him what he is doing.

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