Flipping Houses – A Different Kind of Accounting
Do you buy houses, fix them up, and sell them? If yes, there is a different way to perform the accounting on these types of transactions.
Tax Filing – You can file your tax return on either the cash basis or accrual basis of accounting. If you file on the accrual basis of accounting, the tax return is filed only when you sell the house. For example, if you create NewHouse, LLC in 2011 and purchase a house in 2011, but do not sell the house until 2012, you would not file a tax return in 2011. Instead, you would file a tax return in 2012 when the house was sold.
Recording the Purchase and Improvements – Typically when you purchase a building or house, the amount is recorded as a fixed asset and depreciated. Also, some closing costs are recorded as part of the property’s basis upon the purchase and sale of the property. Major improvements are capitalized and depreciated.
For a house that you are going to flip, the accounting is a lot different. Costs such as electricity, water, bank service fees, advertising, etc. are considered period costs and are expensed. However, costs associated with the purchase of the property, new furniture and fixtures purchased, and improvements made on the building/house are recorded into a Work in Progress asset account instead of fixed assets that get depreciated. When you sell the house this accumulated asset is then recognized as Cost of Goods Sold.