I think I know the answer to this one, but I would appreciate either a conformation or an explanation why it’s different.
I’m mid-rehab on a property purchased in 2006, which will be sold in 2007. For tax purposes, my rehab & carry expenses incurred in 2006 should not be treated as a 2006 expense, but should be “held” as work in process until the house is complete and then moved to cost of goods sold (which means all the expense is recorded on the 2007 tax return along with the income from the sale).
All costs associated with your flip are accrued as Cost of Goods Sold on Schedule C. When you sell the property in 2007 (or whenever), the cost of goods sold will include your mortgage interest as a holding cost.
As far as the IRS is concerned, this property is not in your inventory until the year you sell it.