I bought a investment house that’s being built in Arizona. I should close on the house on May 1st and plan on flipping it immediately afterward. I know that I’ll have to pay short term capital gains taxes. Can I first deduct expenses such as interest, closing costs, landscaping fees, insurance, etc. from the capital gain, then only pay taxes on the remaining amount? I’m just an individual investor and not part of a corporation. It’s my first investment property and I’d really appreciate some feedback. Thanks
Most closing costs should be included in the cost of the property (increase to basis, lowering your gain).
Expenses to prepare the property for sale are considered selling expenses. I would include landscaping as a “make ready” selling expense, as well as any minor repairs (some would not). I would not include insurance here (some would). Major repairs (rehab) should be added as an increase to basis.
Good luck to you.
rtc,
Since this is a flip property, it will be treated as merchandise to your business. If you are doing this as a sole proprietor, all your acquisition costs, maintenance and upkeep costs, and holding costs, are included in the “cost of goods sold” on your Schedule C.
In effect, all your costs become part of your cost basis, even the mortgage interest you might be paying during your holding period.
Sorry to ask this so late, but how is the cost of realtor commission treated? Can it also be included in cost of goods sold?
Technically, No. In practice, the treatment has the same effect.
The “cost of goods sold” is your cost basis. The cost of goods sold is the same whether or not a sales commission is paid. A real estate commission is a selling expense adjustment against your sale price.
Your profit is the difference between the cost of goods sold and your net sale price.