House flipping is a way to make money in real estate. It is one of the most profitable ways. Real estate businessmen are making lots of profit with it. Now, since they are making a profit, they have to pay taxes related to flipping houses to make it legal. The process is quite simple that I mentioned below:
Guide to Report Flipping a House on Tax Return
These steps will help you to report the tax return of flipping house:
You have to record the expense and income as a cash-basis taxpayer on schedule C of form 1040 if you flip properties in the regular course of business. It is going to be a cash-basis entity that means you are reporting income and expenses in the actual year received or paid. Let me give you an example if you negotiate a purchase contract for $50,000, and in escrow, you flip the contract or sell to another party for $60,000, as long as you received the $10,000 profit in 2011, you would report this on schedule C for 2011.
However, you also have to deduct business expenses, which are related to the business of flipping, such as appraisals, telephone expenses, repairs, or escrow costs. Now, if you have 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.
In this step, you have to record an infrequent flipping property contract on schedule D of federal form 1040. This form reports all capital gains, income, or losses. Now, the advantage of reporting this way is that there is no Medicare tax or Social Security due to the profits. Besides, the gain or loss is also treated as a cash-basis transaction that means the income or loss on the capital gain is only recognized in the year it is actually received.
The costs that are incurred for investment income are not deducted as a line item but are instead used to adjust the basis for gain or loss on a transaction. Let me give you an example to make it clear 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.
You must record your flipping contracts the way you do to any other business. At the same time, keep track of all expenses that relate to the business of flipping. Now, the expense categories are listed on Schedule C and include and expenses necessary to operate your business. You should contact an accountant about setting up a recordkeeping system to organize your income and expenses.
You must remember that the common business expenses for flipping contracts would include real estate agent commissions, office expenses, escrow charges, and telephone expenses.
I hope now you know how you can make a report and how to tax return on flipping houses. Make sure to follow as I said here. If you have any problem with your report, then you should take advice from a tax advisor.