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.