The reason I’m writing is I have to file taxes and I need someone that knows how to account for shorts sales. I did short sales for about three years, although I no longer do them.
My strategy is to file as a sole proprietor. Then list mortgage payoffs for all short-sales as cost of goods sold and any proceeds as revenue. My goal is to show a lost for the years I ran the short sale business. The fact is I did run the business and lost money those years. Can you tell me your opinion about filing as a sole proprietor and listing payoffs to banks as cost of goods sold. Ill also list other expenses for those years I ran the business. If I do this do I simply attach a schedule C to a 1040 form. If I do it this way will I avoid capital gains taxes?
O and I have to file my taxes by November 10th.
This is nonresponsive to your question but is general advice for the general audience. When you start a business especially a real estate business find a CPA that deals with real estate investors to do your taxes. You will find that they are no more expensive than using H&R Block. You may not even have any houses yet but you are actively looking. I say that because you will get so much information from him just by being in the same room with him. Once you own 20 house and you try to get a CPA he has to learn you and how you do business and that takes a lot of time. What having the CAP early allows you to do is grow in the most tax efficient way possible. It is like having a CFO on your payroll for the price of a tax return. These guys generally get invited to speak at the local real estate investors clubs at some point during the year. Go to those meetings and use those CPAs.
I already answered your private message, but for the benefit of the board:
You don’t want to “avoid” capital gains tax. Capital gains are taxed at a lower rate than ordinary income. You WANT capital gains.
However, what you describe is a flip. You are negotiating a short sale with a seller, then re-selling the house to an end buyer. Assuming you’re an individual (no entity is involved), filing as a Sch C sole proprietor is not a “strategy,” it’s required. Flips are ordinary business income, subject to income as well as self employment taxes. The house is treated as inventory.
Your math is basically correct, but mortgage payoff is irrelevant. Your cost (COGS) is your purchase price plus any purchasing expenses incurred on the settlement statement. Since you’re turning in 24 hours, there should be little or no carried interest or insurance expense. Taxes maybe a net expense or a credit, depending on who pays for what at closing. Your sales is the sales price per the settlement statement, again adjusted for any selling expenses.
From that you can deduct other business expenses incurred in the calendar year. Prior years’ expenses should have been deducted in prior years.