Posted by Dave T on May 23, 2007 at 20:47:37:
Two different tax treatments.
Rental property income and expenses are reported on Schedule E. All your costs of ownership and rental operation are allowed expenses that offset your rental income. You also take your depreciation expense on Schedule E. Up to $25K in net Schedule E losses can be used to offset your other ordinary income but there are income limits that reduce this “passive loss allowance” for higher income taxpayers.
Rehab and flip property, if owned in your own names, is considered acquired in the year in which the property is sold. You report your share of all your property expenses (purchase cost, rehab cost, holding cost, etc.) as the Cost of Goods Sold on Schedule C as well as your share of the net sale proceeds. Until the rehab-flip property is sold, you and your partner accrue all your costs for the property – you don’t have any deductible expenses.