What Is a Capital Asset, Anyway?
Suppose that Terry Taxpayer, CPA, has a side business acquiring older residential homes for rehabbing. Terry fixes up these homes and resells (flips) them to new homebuyers. Terry operates this enterprise through a single-member limited liability company (SLLC). An SLLC is a “disregarded entity” for tax purposes. Although it is a separate legal entity providing protection for Terry’s personal assets, it is ignored for tax purposes, so any gain or loss on the sale of flipped homes is reported directly in Terry’s tax return. The good, the bad, and the confusing. Assume that Terry makes a healthy profit on each of the flipped homes. How should Terry treat the gain on the sale? Is this a capital gain, taxed at a maximum rate of 15% if Terry has owned the house more than one year? Or is this ordinary income, taxed at Terry’s ordinary income tax rate of 35%? If a flipped home is properly classified as Terry’s inventory, then Terry is considered a dealer in real estate, rather than an investo
Suppose that Terry Taxpayer, CPA, has a side business acquiring older residential homes for rehabbing. Terry fixes up these homes and resells (flips) them to new homebuyers. Terry operates this enterprise through a single-member limited liability company (SLLC). An SLLC is a “disregarded entity” for tax purposes. Although it is a separate legal entity providing protection for Terry’s personal assets, it is ignored for tax purposes, so any gain or loss on the sale of flipped homes is reported directly in Terry’s tax return. The good, the bad, and the confusing. Assume that Terry makes a healthy profit on each of the flipped homes. How should Terry treat the gain on the sale? Is this a capital gain, taxed at a maximum rate of 15% if Terry has owned the house more than one year? Or is this ordinary income, taxed at Terry’s ordinary income tax rate of 35%? If a flipped home is properly classified as Terry’s inventory, then Terry is considered a dealer in real estate, rather than an investo
