When Do You Deduct Rehab Costs?
Hey guys,
I have full time job and I do real estate part time right now. I am doing my Taxes for my LLCs and myself.
Now, I have about 13k in rehab costs on a flip property. Do I deduct it as a repair/labor business expense from my tax, or do I just add it to the list price to reduce the capital gain tax and not list it as an expense on my company?
Rehab costs are part of your basis; you depreciate them over 27.5 years along with the purchase price of the home (minus the value of the land).
Chris
Thanks, so I do not report it as a business expense.
No, you deduct 3.6364% of the rehab cost (pro rated for how much of the year you owned it for), and the cost of the investment property minus the value of the land, on line 20 of Schedule E as a depreciation expense for the first 27 1/2 years you own it.
Unless you are flipping rather than holding it as an investment, in which case the rehab cost and the cost of the property (and purchase, sale and holding expenses) are subtracted from your sale price to figure your profit, which is then taxed at your marginal tax rate (regular income tax bracket).
Chris
Rehab costs are not depreciable for flip property. The rehab cost is an adjustment to basis and reduces the taxable profit on the sale.
Your own labor is contributed free of charge. You can not charge yourself labor.
One other point. Your flip profit is NOT a capital gain. It is ordinary self-employment income. If doing this in your own name, report your flip income on Schedule C (1040) and Schedule SE (1040).
I agree Newkid. The only deduction you can take, if you call it that, is by adding the rehab costs to the purchase price and carrying costs.
Then, when you sell the property, you deduct that amount from your net sales price of the flip property to determine the profit on which you pay ordinary income tax.
[addsig]
Newkid... can you elaborate on your statement that a flip or quick sale property should be reported on SE and not Schedule D. My CPA has been treating all my quicksales as Cap Gain on D. LIke to hear how your experts are treating this.
He takes:
Purchase price + holding + improvements = Gross Purchase Price - Sales Price = Taxable Profit. All deductions taken when the property is sold.
I have more on this topic. I am "rehabbing" two houses right now, I will be "renting" them out for a year and 1 day (at least). I will have the houses 10 months out of this year. Do the repairs I am making this year just add up until I sell it? That sounds strange. I would think they are operational expenses needed to make it ready to rent. These could basically be "make ready" costs. I only spending $10-15k on cleaning them up, new carpet, new paint, fixtures, yard work, etc. thanks.