How to determine value of inventory on 1065

Sorry for the long question but, here goes. Sample scenario. Am a dealer. Mostly flipping.
Beginning of year own 2 houses (in process of rehab) and 1 condo (in process of rehab to rent). Let’s say each house was bought at $100K and the condo @ $50K. Each property has $10K of rehab expenses. Both houses sell during year at $160K each. During year 2 more houses are purchased at $125K each. Each house has $15K of rehab expenses. One of these houses are sold for $200K and the other is not ready by year end. Year end inventory is one house bought for $125K w/15K of expenses and not ready for sale, and a condo rental bought for $50K w/ 10K rehab expenses.

Please correct me if I’m wrong. All the houses are treated as “inventory” and none are depreciated. The condo rental is reported different and is depreciated. The expenses on the one house and the condo which are end of year inventory are subject to the Uniform Capitalization Rules and the expenses are not to be included in inventory thus not deductible for the current year. None of these houses are capital gain situations. The net profit is ordinary income. What about the rental condo if sold in the following year?

What in the above scenario is my beginning of year inventory?
What is my end of year inventory?
What effect does the capitalization on inventory still in stock have effect and how do I deduct those expenses the following year when the properties sell?
How do these inventory balances effect my ordinary income/net profit?
What if condo rental is bad deal (bad tenants, bad neighborhood) and I sell for $20K below FMV and I have a loss of $5000. Do I have to report something special?

Also a little confused since IRS Accounting Periods and Methods Publication 538 states “Do not include the following merchandise in inventory”, “Real estate held for sale by a real estate dealer in the ordinary course of business”. Please help clear things up for me. Thank folks.

i think you have it right, but you’re making it too complicated

sales 160+160+200

cost of goods sold = (100+10)+(100+10)+(125+15)

at year end you have assets on the books of
(50+10)+(125+15) of which the condo is held for rental, and the house for sale. you can call the condo “property” and the house “inventory” it doesn’t really matter as long as you keep them seperate for proper tax accounting.

to avoid dealer issues on the rental, be sure to keep good records of advertisements to rent, tenants interviewed, etc. having both dealt and non-dealt properties can be problematic, but not if you keep good, detailed records of what you are doing with each property.

you should treat the condo as a rental and depreciate it. It will Show up on Sch E (if you are a 1040 filer). When/if you sell it, it will be a capital transaction.

The dealt properties will be on Sch C and treated as “business” income with inventory.

next year, when you sell the house, your Sch C will have sales income and COGS of (125+15). now your “inventory” is zero.

next year when you sell the rental, you will have a partial year on Sch E, and a Sch D transaction of 40 income against (50+10) cost for a capital loss of <20>.

and congratulations, you’re doing well.

Mark you sure do have a way of talking to people in lehman’s term.



If you were a sole proprietor reporting your dealer transactions on Schedule C, then your beginning and ending year inventory is zero.

Dealer realty (inventory) is not recognized as acquired until the year of sale. So, for the Schedule C, you will have sold 100% of your inventory during the tax year leaving you a zero balance.

I don’t know if the same rules apply to a partnership return.