mid-rehab tax question

General Real Estate Investing
1

I think I know the answer to this one, but I would appreciate either a conformation or an explanation why it’s different.

I’m mid-rehab on a property purchased in 2006, which will be sold in 2007. For tax purposes, my rehab & carry expenses incurred in 2006 should not be treated as a 2006 expense, but should be “held” as work in process until the house is complete and then moved to cost of goods sold (which means all the expense is recorded on the 2007 tax return along with the income from the sale).

Thanks for any responses

2

yep.

be sure, though, to include in 2006 any business expenses that aren’t part of the rehab.

3

I also agree. Be sure to note that you don’t consider the property “acquired” for tax purposes until the year of sale. If you sell in 2007, then your acquisition date will be 1/1/07.

4

Thank you both for the responses!

5

One more question - should 2006 interest on my mortgage be taken as a expense in 2007 (when I sell) or in 2006 (when I paid)?
Thanks!

6

You are talking about a flip property, right?

All costs associated with your flip are accrued as Cost of Goods Sold on Schedule C. When you sell the property in 2007 (or whenever), the cost of goods sold will include your mortgage interest as a holding cost.

As far as the IRS is concerned, this property is not in your inventory until the year you sell it.

7

just wanted to be sure…
Thanks!