Is my time spent rehabbing deductible?
I just sold my share of a rehab for $5500 to my partner. The $5500 represents profit after the closing costs and various supply costs to fix the property up.
I know I can further deduct the mileage to and from the property. But can I impute a value of my time I spent to fix the place up and deduct that from my gain? If so, what is the max I can impute an hour?
Sorry your time and sweat (if you did any repairs yourself) are contributions to your rehab project.
Hopefully, your time and sweat kept your costs down and you were rewarded with a higher profit than you would have achieved without your contributions.
Nope. If you think about it, you are getting a better deal by not having your services deductible. For it to be deductible, you would have to claim it as a wages (if the property was held in a entity) or self-employment income which would cancel out any tax deduction. The bad part is that wages and self-employment is subject to social security taxes (e.g., FICA) at rates up to 15.3% on the first $87,000 of wage or self-employment income you earn. (if it is wages, 7.65% is paid by you and 7.65% is paid by your employer-entity which is indirectly you anyway).
If you rehabbed the property, you don't do very much rehabbing each year (i.e., it is not your usual employment) and have owned the property for more than 1 year, you could be eligible for the lower 20% long term capital gains tax, instead of the short-term capital gains tax of up to 38.6% (depending on your income tax bracket).
Hope that helps,
Taxjunkie
Thanks, that was not the answer I was hoping for, but I want to do this right.
My partner was giving me grief when I mentioned the tax consequences I will have vs. his side of the deal. Oh well, you live and learn- but either he really believes you can deduct your time or he was really feeding me some bs.
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On 2003-02-26 20:17, Azsaluki wrote:
Thanks, that was not the answer I was hoping for, but I want to do this right.
My partner was giving me grief when I mentioned the tax consequences I will have vs. his side of the deal. Oh well, you live and learn- but either he really believes you can deduct your time or he was really feeding me some bs.
Taxjunkie says:
I think your partner doesn't know what he is talking about. Hopefully you are using the term "partner" generically and you don't mean that you are in an actual partnership with this person. Why? Because if he has been deducting those expenses on the partnership tax returns (which flows down to your tax return), you could be an unknowing accomplice to his tax fraud. To claim a deduction, you generally need substantial authority. If you don't have that level of authority to make the deduction then the IRS can hit you with a 20% fine (plus interest). Substantial authority does not mean that is what you believe the law should be, but rather statutory or regulations, caselaw, IRS rulings, etc. that supports your position. I suggest you talk with your CPA or tax attorney about this. If you do find that these expenses have been claimed in the past, you may want to talk with a tax attorney to ensure that you are protected under the attorney-client privilege, and to see what you need to do to amend your return to avoid problems should the return get audited.
Although you can't deduct expenses you performed yourself (unless the owner of the real estate is a corporation or LLC and you are paid a salary for your work), you are economically better off by not paying yourself. Why? Who wants to pay them self only to have to claim the wages as ordinary income subject to federal income tax rates up to 38.6% and 15.3% for self-employment or FICA taxes when you can pay only 20% long-term capital gains taxes when you sell your interest to your partner?
It amazes me how many people will jump over dollars to pick up pennies! (I am not implying that you are though).
A good suggestion is to figure out the economics of the deal apart from taxes. If the deal is good without the taxes, it will be better with the tax benefits. Never invest in something solely for tax benefits, because it is like paying $1 out of your pocket to get a 35 cent deduction. My idea of investing is paying out $1 and getting back $1.20 or more!
Taxjunkie
Thankfully this was the first and only deal I had with this guy. He actually knows a guy that is in rehab-rental business part time. My ex-partner was getting this crap from him. But again, I also question whether he was just giving me bs to keep the deal going.
I was throwing the tax consequences out there to bring my buy-out price up. He countered with saying that I could easily deduct my entire gain by imputing my value of time spent. Now I know he was misguided.
I'm actually happy how this deal worked out besides the tax hit.
Taxjunkie or DaveT, could you tell me whether you guys pay taxes on this type of gain on the interim or do you wait until April 15? If you pay on the interim, how do you do it. Thanks.
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Taxjunkie or DaveT, could you tell me whether you guys pay taxes on this type of gain on the interim or do you wait until April 15? If you pay on the interim, how do you do it. Thanks.
That depends if you are in a business of rehabbing or really own do it part time so it is investment property. There is no set guidelines on to what extent you are considered in a business, but if this is your main source of income, you are probably in a business of rehabbing and then reselling. In that case, you would be classified as a dealer and the gain would be considered ordinary income. If it is ordinary income then you would have to make quarterly estimated payments to the IRS. However, if you don't do too many rehab jobs each year and the profit is not your main source of income, the gain would probably be capital gains. In that case, whether or not the capital gains is long term or short term, you would not have to make any quarterly estimated payments, but rather just file and make the payment with your tax return by the April 15th due date.
Hope that helps,
Taxjunkie
Thanks very much for your help Taxjunkie. I can only hope to have rehabbing be my main source of income someday. Its so much more fun than my main job.