When rehabbing a house, are all the expenses specifically related to the rehab (building materials and associated labor) considered improvements (for the purpose of calculating cost-basis)? Or are they deductions? Again I’m specifically referring the the costs for new outlets, lumber, plumber costs, etc…I would think that all those costs would be improvements, and not maintenance deductions.
I try to deduct as much as possible. For what I can’t, I try to reduce the useful life as much as possible to maximize the tax loss.
A rehabilitation project is generally considered a capital improvement. Repairs, when done as part of a larger rehap project are included in the project as a capital improvement.
Dave- that’s what I assumed, but I just wanted to clarify because, as everyone knows, we’re hit so heavily with taxes that I’m just making sure I maximize my deductions while still following IRS rules…
so you would say that a furnace tuneup, which would normally be considered fully deductible as maintenance, as part of a larger rehab project would fall under capital improvements? Just making sure I’m interpreting this correctly…
As I said, when repairs are done as part of a larger rehab project, they are included in the capital improvement. Give a general contractor a rehab work order that includes everything you want done to include the furnace turneup, the entire project will be a capital improvement.
Order the furnace tuneup yourself separate from the rehab project, and you have a repair. If you are your own general contractor, then order the furnace tuneup after the rehab project is completed and you have placed the property in service as a rental.
Thanks for the clarification Dave.
keep in mind that rehab-to-flip is a completely different tax animal from rehab-to-rent.
flips are ordinary income with the house, and improvements, treated as inventory. capital improvement is irrelevant.
if you rehab it to hold and rent, then direct costs of the improvements are capitalized and depreciated along with the purchase cost.
as always, thanks mcwagner.
so any profit from rehab-to-flip is taxed as ordinary income? please elaborate on the house being treated as inventory…how does inventory get taxed?
easiest to see in an example.
you buy a house for 40k. spend 20k fixing it up: new roof, kitchen cabinets, carpet, ceiling fans, paint, flowers in the front yard. Then you sell it for 75k.
That’s 75 sales on your Sch C
minus cost of goods sold (inventory) of 60
equals gross profit of 15
from this you subtract:
those shiny new tools
anything else you spent “on the business”
to get to your net Sch C income
Sch C income is taxed at your bracket PLUS 15% self employment tax. Figure total tax bite ~45% of the NET income.
This is much much different from capital gains on a property held for investment/rental.