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HOUSE FLIPPING

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Is there a guide or some info on how many houses I can flip before the service will consider me a dealer making it subject to SS tax. I have a TP who is a landscape operator but during the course of 2 years flipped 3 houses. Selling all 3 this tax year.  bought 2 in 2017, 1 in 2018. Fixed them all and sold them all. Your opinion please.

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There is no guide to determine investor, or dealer.  It is all based on facts and circumstances, intent and a pattern of behaviour.   It seems to me that flipping 3 houses in two years would classify him as a dealer.  

This might help.

https://rsmus.com/what-we-do/services/tax/the-dilemma-of-dealer-or-investor-classification-for-real-estate.html

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I had a client who flipped 5 houses during the 3 years ending 2017.

I reported them on Schedule D and they went thru.

I claim no special insight, however I do think that I pushed the envelope.

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I think all the guys' answers above (maybe yes, maybe no) are right on the mark.  There's no bright line and mostly it's a matter of luck whether IRS reels him in (chances are good you'll be okay with a "D" nowadays). 

It's better to let the client decide (unless you can't count the houses on one hand) and get them to sign off on it. One thing I'm pretty sure of -- after you advise SE would be due, the majority will maintain those flips were incidental and no business was involved.

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24 minutes ago, BLACK BART said:

I think all the guys' answers above (maybe yes, maybe no) are right on the mark.  There's no bright line and mostly it's a matter of luck whether IRS reels him in (chances are good you'll be okay with a "D" nowadays). 

Copied from Forbes:

The Internal Revenue Service audited only 0.59% of individual income tax returns last year, the lowest audit rate since 2002, according to the IRS 2018 Data Book released today. A closer look shows that it’s the highest earners whose audit rate has dropped the most.

For the highest income taxpayers—returns showing adjusted gross income of $10 million or more--the audit rate dropped from 14.52% in 2017 to just 6.66% in the latest report.

For households with AGI between $5 million to $10 million, the audit rate dropped from 7.95% to 4.21%.

For households with AGI between $1 million to $5 million, the audit rate dropped from 3.52% to 2.21%.

For households with AGI between $500,000 to $1 million, the audit rate dropped from 1.56% to 1.1%.

For households with AGI between $200,000 to $500,000, the audit rate dropped from 0.70% to 0.53%.

Today In: Money

By comparison, for households with AGI under $200,000, the audit rate dropped slightly, stayed the same, or climbed (from 0.48% to 0.54% for $50,000 to $75,000 AGI households).

The report covers data from returns filed in calendar year 2017 and audits in fiscal year 2018. The nearly 1 million audits the IRS completed included more than 892,000 individual income tax return

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Thanks for the stats, cbs -  odds are a little better than I thought.  While, as Max said, three's probably enough to call it a business and, as you said, your five probably did nudge that envelope, I'm fairly sure nothing will come of it AND I'm tired of losing clients on toss-up cases.  If it's debatable, clients frequently later run to Block who says "That guy's crazy - you're not in business.  We'll amend and get your money back." They do/you look bad/that's the last you see of your former client. That's why I say (if it's not a huge amount of money/risk) let the client make the call.

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I tend to oversimplify taxes and overcomplicate everything else.  If you buy an asset thinking you'll sell it when it appreciates without you working on it, you're an investor (Sch D).  If you buy a house to fix up and you think your work (including the work you do to hire the other people who work) will lead to income, you're a dealer (Sch C).  Yeah, I lose a few clients being like this, too.  Not many, but I'm fine with it.  The last one qualified for EITC whether I used Sch C or Sch D,  but I hope she had an investment gain that knocked her right out of it the next time she fixed up a house, and the guy who amended my return lost sleep over it.  What to do, what to do...  Yeah, I know, he didn't, but still...

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21 minutes ago, RitaB said:

Yeah, I lose a few clients being like this, too.  Not many, but I'm fine with it...I hope...guy who amended my return lost sleep over it.  What to do, what to do...  

I do too, but I'm not fine with it (Unisom helps with the sleep).  Low audit odds and lax enforcement seems to be stacking these up during the last few years - a perception is being created that we don't (pick one): get in out of the rain/ know as much about taxes as the big-box people.  

Aw, okay; so you guys aren't buying the ethically-challenged approach.  I guess I'm still smarting from a last-season loss: long-time client questioned about a second 1098 she wanted to deduct and finally admits it's on a (never-before listed) rent house, but says "We don't make anything off it; it only makes the payment" (bet you've heard that before).  I rejected, she left, took three relatives' cases with her, and was at Block's down the street an hour later. 

Oh well; I have my ethics courses (if I can keep affording them) to keep me warm.

 

Hey - client joke: :D

COP: Where did you get these drugs?

PERP: Some dude ran by and gave them to me.

COP: One of these days I'll arrest a guy named "Some Dude" and the judge is gonna throw the book at him!   

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I've lost clients, too. Whole families. But, I gain clients. Whole families. I have more work than I can handle and would prefer to be losing clients by attrition to ease into retirement. I have enough trouble sleeping with an achy knee and those sit-bolt-upright-asking-myself-if-I-remembered-to-do-X-on-a-tax-return moments. I'm not going to add I-wish-I-hadn't-given-in-to-that-client moments. They can trust my expertise or I WANT them to leave.

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Actually my decision making process in a gray area like this is based on:

1.  Discussing the issues/risks with my client.

2.  Evaluating my client's level of risk taking or risk aversion.

3.  Asking myself whether this is a "red flag" potential audit triggering issue.

 

In 27 years, I have only undergone 3 audits, all over 20 years ago.

One was for representation work on a return for a commission salesman prepared by H & R Block.

One was limited scope, only involving whether my client had basis to deduct his large S Corp losses.

The third was an audit of bank account deposits looking for unreported income.

The auditor did find several deposits of totaling $ 3,000 or $4,000 from the sale of used equipment that my client didn't tell me about.

To my surprise, the auditor closed the audit without assessing my client any additional tax ???

I will admit to being too lax in several areas.  This year as I am easing into semi-retirement I have been tightening up on my client's compliance in those areas.

 

 

 

 

 

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6 minutes ago, cbslee said:

Actually my decision making process in a gray area like this is based on:

1.  Discussing the issues/risks with my client.

2.  Evaluating my client's level of risk taking or risk aversion.

3.  Asking myself whether this is a "red flag" potential audit triggering issue.

My approach is about the same as this.  Of course, in the 1098 case described in my previous post there was no choice or "maybe" about it, but I still think the house flip is a judgment call to be determined by your above factors.

Regarding your experience of "In 27 years, I have only undergone 3 audits, all over 20 years ago." - that very closely resembles my track record.

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