Rehab / Taxes Question
This is the situation we have now.
We purchased this duplex in July 2003 for 65,000. We purchased it with Home equity line.
My husband did total rehab in expenses of about 30,000.
We are listing it for sale now and realtor is positive it will sell for 140,000 easily.
My husband had NO income in 2003.
My questions are:
1. Should we wait for 1 year and get less taxes on capital gain? We dont want to rent it just because not interested in landlording now.
2. Can we consider my husbands work there are being paid? Can we include his "salary" as part of expenses.
I know I have to see accounter on this, but I want to have your openions before I do it.
Thanks,
Yulia
Quote:1. Should we wait for 1 year and get less taxes on capital gain? We dont want to rent it just because not interested in landlording now.If you do not want to use your property to generate income for awhile, then it will not matter how long you hold onto it. Technically, your property is dealer realty and your profits are taxed as ordinary income no matter how long you hold the property.
You can change the character of the property from dealer realty to investment property if you put it into service as a rental for awhile. You must demonstrate an intent to hold the property for the long term production of income or future appreciation, before you are allowed to apply the long term capital gains tax rates to your sale profits.
You are potentially looking at $45000 in sale profits. Calculate the tax liability, both for the income tax you would pay at your tax bracket and include the self-employment tax that is also due. Then calculate what your tax would be if you convert the property to a rental and sell in one year. If the tax savings are large enough, will it change your mind about becoming a landlord? Remember, you can always hire professional property managers to take care of the daily landlord issues.
Quote:2. Can we consider my husbands work there are being paid? Can we include his "salary" as part of expenses.If you sell the property now, all of your profit will be considered "salary" anyway and you will have to pay self-employment taxes in addition to your ordinary income taxes.
For work done yourself, your labor is contributed free of charge. If you hire someone to do the work, then whatever you pay for labor can be used to reduce your taxable profits. Right now, it appears that you can only use the actual cost of materials to reduce your taxable profits.
Thank you so much for your professional answer!