Posted by Rolfe Mpls/StP on February 15, 2000 at 19:51:40:
Shane; Remember, talk to an accountant!
I know what you mean. The terms involved can get confusing. In our terms, an expense might be considered anything we spend on a rehab. Bought it for $50k, put $20k into it, sold for $100k. Made $30k. And we are right, until tax time.
If you sell the property, the IRS will treat the profit as a capital gain, and apply the capital gain tax. Capital gain equals the selling price less your aquisition costs less capital improvements (rehab). It’s a different tax form, with different rules.
If you rent the property, you depreciate your aquisition costs plus the capital improvements (the basis), not the fair market value. The cap gain is calculated whenever you sell the property.
In either case, the IRS considers “expenses” to be only business expenses, such as office supplies, auto, maintenance, and repairs. Remember the three criterea for capital improvements in my prior answer? Any building activity not covered there is considered an expense.
Often, the only real difference between the way we think and the official accounting or IRS term is symantics.
Good Luck; Rolfe