What costs are included in Basis of a real estate investment - Spidell

What costs are included in Basis of a real estate investment

Log in to Post

Message Board What costs are included in Basis of a real estate investment

Viewing 3 reply threads
  • Author
    Posts
    • #219682
      Chris Wolf
      Participant

      If you own a SFR purely for investment purposes (to flip it), what costs can you add to the basis of the property? Obviously any costs to purchase or improve the house add to basis, but what about other costs to maintain the property until it is sold. Cost of utilizes, real estate taxes, association fees, insurance, legal fees, interest, etc? Does it make a difference if you own 7 properties? What if they are in different locations? Would this then be considered a business? At what point does it become a business and not just various investment holdings? How would a business treat the properties? would they be treated like inventory, not subject to Capital Gains? Maybe there is an article you can point me to.

    • #219731
      Lynn Freer
      Participant

      Sounds like they are in the trade or business of flipping and everything should go on Schedule C. I think the taxes, interest, and maintenance, along with the repairs should be part of cost of goods. Would welcome confirmation on this

    • #219738
      Chris Wolf
      Participant

      I was reading IRS Pub 551 “Basis of Assets” talks about Uniform Capitalization Rules, which would capitalize all direct and an allocable part of the indirect costs for a trade or business. It also says that each asset must be accounted for separately, and I would assume still qualify as Capital Gain treatment if the “asset” or Real property is held more than a year. There is an exception to the Uniform Cap Rules, if the business has less than $25 mil. in gross receipts for the 3 preceding years, then you don’t need to follow these rules.

      Here’s where it gets fuzzy:

      Deducting vs. Capitalizing Costs-

      Don’t add to your basis costs you can deduct as current expenses. For
      example, amounts paid for incidental repairs or maintenance that are
      deductible as business expenses can’t be added to basis. However, you can
      choose either to deduct or to capitalize certain other costs. If you capitalize
      these costs, include them in your basis. If you deduct them, don’t include
      them in your basis. See Uniform Capitalization Rules , earlier.
      The costs you can choose to deduct or to capitalize include the following.-

      1. Carrying charges, such as interest and taxes, that you pay to own
        property, except carrying charges that must be capitalized under the
        uniform capitalization rules.

      And the list goes on. But it looks like you can Capitalize theses costs, unless you choose not to capitalize these costs. So if you have a business, then expense them, if you don’t, capitalize them so you get a deduction when you sell the property?

    • #219740
      Lynn Freer
      Participant

      There is a difference between flipping one property and flipping multiple properties. If they are flipping multiple properties the treatment is ordinary income, not investment income subject to capital gains. There are cases that I believe put the line at 5 properties.

Viewing 3 reply threads