CAPITAL GAINS OR INCOME - Posted by Keith Kern

Real Estate Investing
#1

Posted by JPiper on January 26, 2001 at 10:09:46:

“Save” is not really the right word, but I suppose in a sense it would be like that. In a rehab when I incur an “expense”…let’s say I install a hot water heater, that amount is debited to the property account…meaning the amount invested in the property increases…cost basis goes up. The repairs continue to accumulate until such time as the property is sold. Upon sale, the cost basis is subtracted from the sales proceeds.

Credit card interest? That’s a good question. My tax guy seems to think that this could be legimate as long as you haven’t mixed personal use and business use on the credit card. However, I would say this is somewhat aggressive. Probably should be addressed to your tax advisor. If it is legitimate it too would be added to the cost basis of the property.

JPiper

#2

CAPITAL GAINS OR INCOME - Posted by Keith Kern

Posted by Keith Kern on January 25, 2001 at 07:52:30:

CAN I TAKE PROFITS FROM MY REHAB AS INCOME. THIS PROJECT IS BEING DONE UNDER A BUSINESS NAME. IF SO HOW? OR IS THIS ONLY CAPITAL GAINS.I WOULD LIKE TO WRITE OFF MATERIALS, UTILITIES, ETC FOR THIS REHAB ON 2000 TAXES BUT, REHAB WONT BE COMPLETED UNTIL 2001.

THANKS

#3

Re: Depends on intent… - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on January 25, 2001 at 19:06:01:

So read the directions that are provided at IRS, then read the minutes of your last corporate meeting to determine corporate intent here (IRS will read the minutes). Then make your decision based on the facts; and please turn off your cap lock.

#4

Re: CAPITAL GAINS OR INCOME - Posted by JPiper

Posted by JPiper on January 25, 2001 at 13:52:20:

Keith:

You really have two separate issues here. First, utilities, holding costs, materials, labor costs, etc should be capitalized until such time as the property is put into use…ie rented. What that means is that these costs incurred in 2000 should be added to your cost basis. They would not properly be “written off”.

Next year if you sell the property, these additions to cost basis will serve to reduce your profit, and therefore your tax next year.

Finally, if your intent with this rehab is to resell, then my opinion would be that it will never be a capital gain…regardless of how long the property is held. Instead, the profit would be treated as income to your corporation, or as a profit on Schedule C if you’re not incorporated.

You should confirm the above with your CPA, who hopefully has some experience with real estate transactions.

JPiper

#5

Depends on holding period - Posted by Rolfe Kurtyka

Posted by Rolfe Kurtyka on January 25, 2001 at 13:40:52:

Keith;

The tax which applies from the sale of a property depends upon how long that property was held. The magic number is 12 months. Any gain from the sale of a property held LONGER than 12 months will be subject to capital gains. Any gain from the sale of a property held LESS than 12 months will be taxed as ordinary income.

Good Luck! Rolfe

#6

Re: CAPITAL GAINS OR INCOME - Posted by Shane (IN)

Posted by Shane (IN) on January 26, 2001 at 08:41:25:

Therefore, are you saying that all costs associated with the renovation should be “saved” to offset the profit in the year that sold? Meaning, past years worth of expenses (material, utilities, labor, etc.) are to be added to the cost basis to reduce the profit generated from the property that is sold in the future. You basically don’t do anything with your taxes until you sell the property. Is that correct? I’m in that situation now with a house that has been a weekend project. I’ve incurred expenses on the property over the last 2 years and have yet to deduct anything off of my taxes. I was hoping that I could wait until it sells this years in order to write these expenses off of next years taxes. If not, I could always amend my past returns to show a deduction of these expenses. In addition, is credit card interest considered an expense to the property? This is important considering alot of my material and subcontracted labor is on a credit card and will be paid off when the property sells.