Rehab of Home for resale - what expense can be taken?

[Zee]

Client bought a fixer-upper for resale, must all expenses and the interest on the loan be added to basis including utility bills, insurance, etc.? Can anything be expensed?

[Zee]

Help! Where's Bees when you need him?

Just a "bump" since I have no answers. I'm not trying to be lazy, don't see a reference in the taxbook to people buying a fixer-upper as an investment. I'm wondering if all the expenditures need to be part of basis, or things like insurance, property taxes, utilities, can be expensed. Can someone guide me to a TB reference, or answer?

[Bees Knees]

Well, it depends on what you mean by investment. Is this a business? Is it a one time investment? There is no clear cut answer to that.

An investment is traditionally something you purchase that you hope will appreciate in value over time, and then sell for a profit.

A business is traditionally something you purchase for re-sale, and/or put substantial services towards to make a profit.

Both have the goal of making a profit, but both are taxed quite differently.

Investment expenses are only deductible on Schedule A, subject to the 2% AGI limitation. Investment interest expense is deductible on Schedule A, NOT subject to the 2% AGI limitation, but it is limited to investment income.

Business deductions are fully deductible, but profits produce SE tax. If it is a business, a rehab home would be considered inventory and all costs are capitalized until sold.

A person who purchases a rehab home to fix up and then sell for profit is engaged in both an investment and a business, depending on your point of view. Take your pick. I tend to believe once you put substantial time and effort into the activity, it’s a business.

[Zee]

Well, it depends on what you mean by investment. Is this a business? Is it a one time investment? There is no clear cut answer to that.

An investment is traditionally something you purchase that you hope will appreciate in value over time, and then sell for a profit.

A business is traditionally something you purchase for re-sale, and/or put substantial services towards to make a profit.

Both have the goal of making a profit, but both are taxed quite differently.

Investment expenses are only deductible on Schedule A, subject to the 2% AGI limitation. Investment interest expense is deductible on Schedule A, NOT subject to the 2% AGI limitation, but it is limited to investment income.

Business deductions are fully deductible, but profits produce SE tax. If it is a business, a rehab home would be considered inventory and all costs are capitalized until sold.

A person who purchases a rehab home to fix up and then sell for profit is engaged in both an investment and a business, depending on your point of view. Take your pick. I tend to believe once you put substantial time and effort into the activity, it’s a business.

Good questions. It's a one-time situation. They have no intent, whatsoever, to ever get involved again in such a situation. They've learned their lesson after the market nose-dived here in Florida.

As such, I believe it's an investment. It's my understanding that the investment interest must be capitalized and most other expenses. I'm just not sure about utilities and property taxes. If they can be deducted, I'd call them investment expenses.

Unfortunately, I deducted the interest as investment interest last year ($7800). This year, the interest is almost $20,000. So, I'll probably have to amend last year if I treat all expenses as basis.

What's your take on the utilities and property taxes?

[DaveO]

For those that I have treated as "investors"

Who rehab a single home I capitalize everything, interest, supplies, insurance the works. If they are in the "business" I would deduct travel and tools on the "C" and capitalize the rest.