The popularity of house flipping has increased dramatically in recent years, so you’re likely to have clients who are interested in this activity, or who are already doing so.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: How do you know who is a qualified intermediary?

A: A qualified intermediary is a person who meets the requirements under specific sections of the U.S. Internal Revenue Code (IRC) to perform certain activities.

Q: What is the difference between a flipper and a rehabber?

A: Flippers may or may not make improvements to a property before selling it, whereas rehabbers always make improvements before selling.

Q: Can investors depreciate their property?

A: No, investors cannot depreciate their property unless it is placed in service as a rental property.

Q: For an installment sale, should Form 6252, Installment Sale Income, be reported when the sale occurs or in the tax year when the first payment is collected?

A: Form 6252, Installment Sale Income, should be filed in the year the sale occurs.

To learn more about preparing taxes for house flippers, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

Question: Walter and Steffie were married and in 1998 they purchased a primary residence together in Maine. In late 2020, the two divorced, but still owned the residence together. That year, they also converted the property to a Schedule E rental activity. The activity accrued suspended passive losses (PALs) through 2021.

When Walter remarried in June 2021, he decided to quitclaim deed the property to Steffie, who plans to sell the house eventually.

Does the transfer of the property release the suspended PALS?

Answer: No. Neither Walter nor Steffie will be allowed to immediately deduct the suspended passive activity losses associated with the house upon either transfer or sale although Steffie will be able to use her PAL in a different way.

When Walter transferred his ownership of the property to Steffie within one year of their divorce, under §1041(b), Steffie received a tax-free gift, with the carryover basis of the spouse who made the transfer. Therefore, Walter will not be able to deduct his portion of the suspended losses. Also, in this circumstance, when the transferred property involves passive activity income, for Steffie, the suspended losses are added to the tax basis of the asset being transferred. [§469(j)(6)]. Therefore, she will also not be able to deduct the suspended losses but may only use them to reduce her gain.

In official guidance from the IRS Market Segment Specialization Program (MSSP) Audit Technique Guide on Passive Activity Losses, the IRS states that transfers incident to divorce should be treated as gifts and the suspended losses of the donor spouse added to the basis passing to the receiving spouse. Thus, the recipient’s deduction of the suspended passive loss generally is deferred until the property is sold.

Whether you are licensed or unlicensed, it’s important that tax preparers know how to work with the IRS to resolve their clients’ tax issues. Understanding the IRS organization and the various tax problems clients may face when working with the agency are vital components of this knowledge. This includes staying updated on current regulations, knowing the appropriate channels for addressing disputes and having a comprehensive grasp of potential tax challenges.

By equipping yourself with this information, you can better serve your clients and effectively manage any tax-related complications that arise.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: Is there a timeline for when the IRS will update Circular 230, as the current version is over 10 years old?

A: There have been discussions of an update, but there hasn’t been any official announcement as to when it’s coming.

Q: How do you set up an e-services mailbox?

A: You can sign in to the e-services mailbox using your ID.me account. More information is available on the IRS website: https://www.irs.gov/e-services.

Q: What is a CSED?

A: CSED stands for Collection Statute Expiration Date. It’s the end of the statutory period the IRS has to collect.

Q: Can the IRS provide an actual copy of a Form 1099 issued to a taxpayer when the taxpayer did not receive one, cannot get one and is being assessed tax on it

A: You’ll need to call the IRS at 800-829-1040 for help with missing or incorrect Forms 1099.

To learn more about IRS representation, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.