Accounting for flips in REI Hub
Accounting for fix and flips in REI Hub is similar to rentals, but with a few key differences. At the most basic level, you will add the property in question to the system, and assign transactions to it, just like the basics of rental property accounting. However, there are a few key differences and nuances to be aware of.
The biggest thing to be aware of when keeping the books for flips is that virtually all of your rehab and remodel costs are fixed asset purchases, or capital expenditures, and not standard expenses. The IRS considers all costs prior to placing an investment property in service (when you list it for rent), and all improvements in general, to be capital expenditures and part of your initial investment. Regular expenses, on the other hand, are costs incurred in the course of operation, and written off against income.
Therefore, since flips are not listed for rent (placed in service) and do not operate as rentals (no standard revenue and expenses), you will book all your rehab costs using the Fixed Asset Purchase transaction type, NOT the Expense transaction type.
The most complicated part of accounting for flips is generally the property purchase and property sale journal entries. If you are working with a CPA or financial professional they can likely handle those journals, or you can follow the instructions linked below.
To properly account for your flips in REI Hub:
1) Add your properties and operating bank/ credit card accounts
Check out our Overview and Getting Started Guide for a top level look at the different parts of the REI Hub system, as well as links to other specific Knowledge Based articles such as how to add a linked bank account or credit card.
2) Create a fixed asset for the property
In REI Hub, fixed assets are used to track capital expenditures (where your costs are recovered through depreciation, not expensing) such as purchasing and renovating an investment property. Create a fixed asset specific to the property you are flipping. You will use this fixed asset when entering in your renovation costs and purchase/ sale information.
3) Book all flip / renovation costs as Fixed Asset Purchases
Since all flip renovation costs are capital expenditures, they need to be booked using the Fixed Asset Purchase transaction type, NOT the Expense transaction type. Find and select Fixed Asset Purchase from the transaction type menu.
4) Optionally enter in the property purchase journal entry
This is an important transaction, as it sets the property's basis and therefore it's depreciation schedule. If you work with a CPA or tax preparer they may plan to handle it on your behalf; in which case you may choose whether or not to enter this information into REI Hub.
Here are instructions for how to make the journal entry for a recent property purchase in REI Hub.
The biggest difference in purchasing property for a flip vs for a rental is how you will treat closing costs. Unlike when purchasing for a rental, where you can immediately deduct some of your closing costs, all closing costs for a flip are capitalized. Since a flip will never be placed in service or operate as a rental, there is no revenue or rental business to deduct expenses against.
The property purchase journal entry does not need to be entered first- REI Hub allows users to backdate manual transactions as needed.
5) Optionally enter in the property sale journal entry
Similar to property purchases, property sales are complicated transactions that touch multiple accounts. Unlike purchases, the journal entry for sales will look differently based on whether or not existing basis and fixed asset information is present in the system.
Here are instructions for how to enter in a property sale journal entry in REI Hub.