Accounting for fix-and-flips in REI Hub is similar to rental property accounting but with a few key differences. At the most basic level, you will add the property in question to the system and assign transactions, 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 your rehab and remodel costs are fixed asset purchases or capital expenditures, not standard expenses.
The IRS considers all costs before placing an investment property in service (when you list it for rent) and all general improvements to be capital expenditures as part of your initial investment. On the other hand, regular expenses are costs incurred during operation and written off against income.
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 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 and take steps 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 because you will use this fixed asset when entering 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 must 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 its depreciation schedule. If you work with a CPA or tax preparer, they may plan to handle it on your behalf, so you may choose whether or not to enter this information into REI Hub.
The biggest difference between purchasing property for a flip and renting is how you treat closing costs. Unlike when purchasing 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 operated as a rental, there is no revenue or rental business against which to deduct expenses.
The property purchase journal entry does not need to be entered first, as REI Hub allows users to backdate manual transactions as needed.
Here are instructions for how to make the journal entry for a recent property purchase in REI Hub.
5) Optionally enter in the property sale journal entry
Like property purchases, property sales are complicated transactions touching 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 a property sale journal entry in REI Hub.
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