Ireland-based taxpayer dealt significant financial setback after investing €2 million in property development, now burdened with a €61,000 tax liability instead of the anticipated €2 million profit.
In a recent ruling, the Tax Appeals Commission (TAC) upheld a Revenue assessment against a taxpayer who failed to carry out his plans to build and sell houses, resulting in disallowed trading losses.
The taxpayer, who had no prior experience in land development, purchased a 4.5 acre site for €330,000 in 2005 with the intention of building and "flipping" a few houses. However, due to the property crash in 2007, the taxpayer abandoned his plans to develop the land.
The taxpayer claimed trading losses of €168,120 from 2008 to 2015, which were disallowed by the Revenue as the taxpayer was not carrying on any trade to qualify for such losses. The taxpayer's appeal against the Revenue assessment was unsuccessful, and he was left with a tax bill of €61,281 following the failure of his appeal at the TAC.
The Revenue's decision to disallow the trading losses was based on the conclusion that the taxpayer never intended to engage in the trade of land development. Commissioner Simon Noone found that the evidence suggested a distinct lack of urgency on the part of the taxpayer to progress the development of the site.
Since flipping houses is treated as business income, and not capital gains, profits (and losses) flow through the taxpayer's ordinary income and self-employment tax calculations. Failed flips resulting in losses would typically reduce taxable income if recognized as legitimate business losses. However, if the IRS disallows the losses—possibly due to failure to meet the "for profit" motive or insufficient business activity—then those losses cannot offset other income, removing the tax benefit and potentially increasing the taxpayer’s tax burden.
Additionally, if the taxpayer did not complete the flip (i.e., never sold a renovated house), expenses and losses might be reclassified as personal or capital in nature, which could have different and often less favorable tax treatment. The disallowance of losses may also prevent using the losses to offset gains elsewhere, meaning the taxpayer incurs the full tax liability on any other income or profits.
Because flipping is treated as an active business, the taxpayer would typically need to maintain meticulous records and demonstrate intent to profit from the business to support deductions or losses; failure to do so can lead to loss disallowance and penalties. Furthermore, the inability to use a 1031 exchange on flips means the taxpayer cannot defer capital gains taxes by reinvesting in similar properties, which could amplify tax exposure if a flip is sold at profit.
Given the complexity and the risk of disallowance, taxpayers in such scenarios should seek professional tax advice to navigate record-keeping, intent, and loss reporting requirements. This case serves as a reminder of the importance of proper planning and documentation when engaging in house flipping activities.
The taxpayer's failed house flipping business, intended to generate profits from building and selling houses, led to a tax bill of €61,281 when the Revenue disallowed his trading losses. Since the taxpayer did not complete any sales, expenses and losses from the business might have received less favorable tax treatment if they were reclassified as personal or capital in nature.
