Investment Property

[Chowdahead]

Have a client who purchased an investment property at auction in June 20009 for $30,000. Invested about $31,000 fixing it up. Sold it for $115,000 in January 2010.

Before expenses, there would appear to be a gain of $85000. After expenses it's a net gain of $64,000.

I am assuming this is a typical short-term Schedule D capital gains item of $64,000, correct?

Any other considerations that need to be looked at?

[Chowdahead]

On the Sch D, are the expenses simply added into the Cost/Basis along with the purchase price of the property?

[Pacun]

On the Sch D, are the expenses simply added into the Cost/Basis along with the purchase price of the property?

It is a simple Short term gain and just either add some expenses on the basis or look on Sch D and enter them there.

I would be careful with this client... he seems too smart to be my client.

[jainen]

>>purchased an investment property<<

It may have been an investment for the seller, but the buyer never held the property for capital growth from market conditions. He spent MORE on repairs than the entire capital purchase. The increase in value was directly related to his own profit-motivated activity. That is the very definition of business. Report the entire activity on Schedule C.

[Pacun]

What does your smart client do for a business? If he is a Tax preparer, Sch D. If he is in the business of reconstruction, maybe sch C as Jainen suggested.

[Chowdahead]

He has no other income right now, since he is out of work. But he had some savings and used them to invest in this property. However his wife works a regular job.

He didn't do the work himself. He hired contractors to do the work.

I was always under the assumption it was a short term capital gain. He's not a speculator or anything. So he doesn't even have plans to do this again it's not really his line of work. So this sounds like a Schedule C? Wouldn't that be more costly due to the self-employment tax?

I have both HUD closing sheets, from the original purchase and the sale 7 months later. I was under the impression that the closing attorney usually gave the seller a 1099 whenever there is a substantial gain. But nothing was issued.

[Pacun]

He has no other income right now, since he is out of work. But he had some savings and used them to invest in this property. However his wife works a regular job.

He didn't do the work himself. He hired contractors to do the work.

I was always under the assumption it was a short term capital gain. He's not a speculator or anything. So he doesn't even have plans to do this again it's not really his line of work. So this sounds like a Schedule C? Wouldn't that be more costly due to the self-employment tax?

I have both HUD closing sheets, from the original purchase and the sale 7 months later. I was under the impression that the closing attorney usually gave the seller a 1099 whenever there is a substantial gain. But nothing was issued.

Report it on Schedule D as short term gain.

The attorney is not in a possition to issue a 1099 since he doesn't know what the basis for the seller is. Even if he knew all the details and audited the expenses and cost, attorneys are NOT hire to determine gain on the transaction.

[Chowdahead]

Report it on Schedule D as short term gain.

The attorney is not in a possition to issue a 1099 since he doesn't know what the basis for the seller is. Even if he knew all the details and audited the expenses and cost, attorneys are NOT hire to determine gain on the transaction.

Maybe it's not a 1099. I can't remember the form number off-hand. But I have seen a form issued by the attorney whenever a large amount of proceeds are paid to a seller. On the form it says "This information is being furnished to the IRS".

Otherwise, how would the IRS be made aware of such a substantial payout?

[Pacun]

Maybe it's not a 1099. I can't remember the form number off-hand. But I have seen a form issued by the attorney whenever a large amount of proceeds are paid to a seller. On the form it says "This information is being furnished to the IRS".

Otherwise, how would the IRS be made aware of such a substantial payout?

Correct, form 1099-S should be filled out. Why do you need that form if you have both HUD-1s?

[Gail in Virginia]

Actually the attorney should have issued a 1099-S, Proceeds from Real Estate Transactions, for this event. Unless the attorney had some reason to think that this was a personal residence sale, they should have issued the 1099. The fact that the Sch. C results in more taxes is not the reason to rule it out. You need to look at the facts and circumstances surrounding this transaction. Jainen has a point, although I think most of us would have put this on a Sch. D without much thought, and I think that Jainen's point is that we do need to think about everything related to the transaction when we prepare a return.