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Asset Type and Depreciation related to residential real estate investments

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Level 1

Hi Intuit Accountants Community!

I have a partnership that purchases residential properties which it renovates and then sells them at a profit.

Question 1: In the ProSeries Tax Software, Asset Entry Worksheet, which asset type do I choose? Would it be Residential rental real estate?

Question 2: Do I take depreciation each year before I subsequently sell the properties?

Thanks very much I appreciate any guidance you can lend.

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8 Replies 8
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Level 15

 If they are renovated and sold there is no depreciation. This is essentially inventory.


ex-AllStar
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Level 12

Items held for resale are not depreciated, so you don't need to add them as an Asset.

 

EDIT:  Susan beat me by 22 seconds.

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Level 15

You beat me in about that on the last one. 😀


ex-AllStar
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Level 13

I thought you left it for someone else to stop in and be helpful 🙂

 

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Level 1

Hey Tax Guy Bill, sjrcpa and qbteachmt......thanks for the replies to my questions.

I have a fee more, just trying to understand.

1. So if I don't add the property as as asset, does this mean that I don't have to show the transaction of purchasing the house in the partnership tax return?

2. In addition to the transaction of closing on the house,  there was mortgage interest, real estate tax, utilities, etc. and the costs to renovate the house during the months that after the house was closed on. The house was purchased in 2019, but not sold until 2020. Do I claim the mortgage interest, real estate taxes, utilities and all other operating costs as expenses on for 1065? Which then flow to the partners Form 1040's? And what about the costs to renovate the house so it can be re-sold in 2020? 

 

Thanks again.

 

Jabbo

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Level 13

1. They are holding Inventory; the Improvements to it are more inventory value. Then, when it sells, all of the accumulated invested value is Cost of Goods Sold, so that you are matching income to the costs that generated that income. That is the profit that will be reported for taxes. Inventory is a different type of asset than Depreciating property.

2. No. Nothing there that relates to the property is Expense. It's part of holding the inventory until it sells. The only expenses would be, for instance, General Liability insurance and postage and other entity costs.

It seems you need to do some research on Flipping Property.

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Level 1

Thanks again qbteachmt, as you can see, I'm a novice when it comes to the tax treatment of Flipping Property.

This is the first year that I have a client with this tax scenario; the purchase and re-sale of real estate investment property.

I do appreciate your guidance.

Jabbo 

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Level 13

"Would it be Residential rental real estate?"

No, because your client is not Keeping the property and Operating it. Depreciation applies to something In Service and starting to "wear out a bit" per its Use under the IRS regulations. You have neither condition here: It's not Residential Real Estate being rented.

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