Can You Write Off Expenses On Rehab Project
Can you write off expenses when you have a rehab house that you will turn around and sell? The home would be held in a Sub-S Corp, not in my name. How does that work on the $$ that you make? [ Edited by nsor on Date 10/19/2003 ]
I assume your question is referring to the rehab costs.
The answer is NO. Your rehab expenses are added to the basis of the property, they are not direct deductions. You recover your rehab costs when you sell the property.
They would only be deductions if this were your primary residence and you could deduct fix up expenses. The other member is correct in that fix ups for an investor will just reduce your profits, though still subject to long term or short term capital gains, depending on how long you hold the property for
Quote:They would only be deductions if this were your primary residence and you could deduct fix up expenses. pcglobal,
Sorry, but repairs and fixup costs to your primary residence are not deductible. They are not added to your cost basis either -- they are out-of-pocket personal expenses.
Renovations or rehabilitations are capital improvements that increase the value of the property or prolong its useful life. These are capitalized by adding these costs to your basis. You recover these costs from your profits when you sell.
The only deductions you can take for your primary residence are mortgage interest and property taxes.
If there has been a recent change to the tax code that renders everything I said incorrect, please post the citation so we can all benefit.
Quote:
On 2003-10-19 15:35, nsor wrote:
Can you write off expenses when you have a rehab house that you will turn around and sell? The home would be held in a Sub-S Corp, not in my name. How does that work on the $$ that you make? You need to distinguish between capital improvements (a new A/C unit, new kitchen cabinets), and expenses (a temporary tarp for a section of roof you're going to replace). Generally, if it's designed to last into next year, it's capital. That means it goes into your cost basis for the property. If it's temporary, it's an expense ... you get to deduct it all currently. If you buy a drill, that's capital for your business but you can probably use Sec. 179 to expense it currently.
When it comes to your personal residence, only the capital category does you any good ... it goes into your cost basis for the home. Other expenses are as useless as those for last week's Quarter Pounder with cheese.
Thanks everyone for the information, very helpful, let me just run a scenario below so that I am clear on it.
1. I buy a distressed property that is not my primary residence say for $50,000, in an area where the comps for this home are running around $85,000 - $90,000.
2. I put in $15,000 for Labor and repairs. (My brother will be doing most of the work, he has a painting/plastering business and does handyman work, I will be paying him for his time). I have the cash, he has the know how on fixing up.
3. I put the house up for sale and get say, $85,000 for it. My profit would be $20,000.
4. My question is, would I get taxed on $20,000 or would I get taxed for $35,000?
I think it would be $20,000 since the repairs would go towards the basis? Just want to make sure I understand the real estate lingo. The basis means the amount I paid for it, plus the repairs I put into it to bring the value up?
Thanks all, you really have been helpful!
You are correct. The labor and materials cost would get added to you basis. So, You basis would become the 50,000 pp plus the 15,000 direct expenses. You gain would be 20,000.
Thanks much!!! As soon as I make my first purchase, or even the events before that, I will share experiences, lessons, progress, etc. Would like to help others on the board since I have been helped so much. Thanks again all!
Also, you may need to 1099 your brother for tax purposes. Make sure to check with your CPA.
Sorry about responding to an old post but this is way off..... I am not an accountant so this is not legal advise.
When you wholesale or rehab a property the IRS considers this an active trade or business. In essense you can think of your homes as an "inventory." You do NOT claim depreciation. Most everything that is spent on the home comes out of "cost of goods sold" and the rest an "expense".
It becomes tricky if you rehab and then rent it out so I might consider setting up an S-Corp for rehab and it would sell it to your LLC to hold. Much simpler in my opinion. Trying to deal with a steped-up basis can become very expensive.
Hope this helps and no one minds that this is an old post.
myfrogger,
The original question was about expensing the rehab costs for a flip property.
The simple and correct answer is that rehab costs are added to the property cost basis, which you confirmed. This answer is still correct for an investment property held for rental use, and in most cases, for the property used as a primary residence.
What is "way off" in the thread?
Thanks again for the feedback. I may also be holding some after rehab for rentals further down the road. I did not think about having my s-corp sell to my LLC, I just learned something here, so glad you posted. It's all good!
I have an offer on REO property, hopefully, this will be my first rehab. I also received permission from a bancruptcy attorney to talk to one of his clients. We may want to try and buy this particular property pre-forecloure. So we have 2 possibilities. We will see, I have been working diligently to try and get my first property for the last 3-4 weeks, so hopefully one will come soon. I know it must be the right deal before we buy it.
Quote: I did not think about having my s-corp sell to my LLCnsor,
There may be self-dealing issues as well as tax consequences here. Be sure you carefully review this strategy with your tax advisor.