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Building a Home

tax deductions for building an investment property

13 years ago

I live in the state of Washington and I am considering building a home for investment purposes and I am wondering about the tax liabilities for doing so. For example, if I were to decide to buy 100k in stocks and sell the stocks a year later at 125k, I would pay taxes on the capital gains of 25k. Now, if I were to instead take that 100k and build a home with it and sell the home for 125k, would I be taxed on the 125k total improvement or would I be able to deduct the initial 100k I put into it and pay taxes only on the 25k profit. I would think this should be possible, otherwise, I see no incentive to invest in building a home, providing several jobs, and propping up my local economy. Tax accountants, home builders, your feedback would be greatly appreciated.

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Comments (5)

macv
13 years ago
The capital gain on a house is similar to stocks but for a house that has been your principal residence for 2 out of the 5 years before you sell it, you can claim a capital gain tax exemption of $250,000 per spouse.

If you build a house and sell it you would be taxed on the sale price minus all of the expenses of building and selling it.

You need to consult a tax professional to put together the best approach for your situation.
macv
13 years ago
For it to be an "investment property" you need to gain income from it over time which is normally in the form of rent. In that case you can deduct the cost of building and maintaining the house over the appropriate amortization periods.
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I assume that if you pay it prior to Dec 31 you can deduct it from this year's taxable income, and if you pay it next year, you'll deduct it next year. So the difference is the possible savings in the year interim vs., ordinarily, the return that you could have got on the money. In your case, however, less the costs involved in deferring paying the other bills in the meantime. Adjusted for what different tax rate that you may have to pay on the highest taxed dollars of your taxable income, next year, if different from the rate this year. Would it make more sense to borrow some at the bank to pay the other bills, if the difference in cost would be marked? If only minimal, probably not worth the bother - unless you want to build a solid credit history, lacking one at present. Though, if you're farming, I think that building a credit history will not be a concern! Also - how long before you may be able to pay off the other bills (and what new unpaid bills may you have rung up in the meantime)? Hope you are able to figure which is best. Good wishes for the New Year. joyful guy
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fabsroman
13 years ago
I was looking for info on what it costs to build a shell and ran across this post. Figured I might as well lend a helping hand.

There are a bunch of scenarios here. If you merely intend on building the home and then selling it, you would only recognize the $25,000 as a capital gain. However, you need to document all your expenses very well in arriving at the $100,000 in costs and be able to prove them should you get audited. Whether it is long term or short term capital gain depends on how long the house is held. Your $100,000 in expenses to build the house is your BASIS in the property. The cost of land is also added to BASIS. However, only the cost of the improvement can be depreciated.

If you want to rent the property out, then you have to start talking about depreciation, passive activity loss limitations, depreciation recapture, etc. It gets a lot more complicated than I am willing to get into on here.

As far as the 2 out of 5 years rule is concerned, Congress just changed this rule to prevent people with multiple rental properties from moving around every couple of years to shield $500,000 in capital gains for married couples. Again, talk to a CPA in your area about this. If you weren't all the way across the country from me, I would offer you my services.

Good luck.
macv
13 years ago
fabsroman, if you did offer your professional services you would be in violation of the terms of service at the GardenWeb.

The change in the principal residence capital gains rule is that the exclusion is reduced proportionally by the number of years (out of 5) that you did not live in your house (up to 3). That is unlikely to matter in your situation and if it did you could live in the new house for 2 years and then sell it.
seaprt
Original Author
13 years ago
Thank you all for your help. I understand all the suggestions made here and will also get together with my CPA, but this will help me plan out my questions and not spend so much time explaining things to her.

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