Investment property expenses?

Question

Should my husband and I wait until we sell our investment property, purchased in 2006, before deducting our expenses? We're not sure if we should file those expenses on our personal income tax forms now or on our business tax forms when we sell it. My husband has his own home improvement business and has personally done all the work on our investment property which we bought to "flip".

Thank You,

MR

Answer 1

Investment expenses are generally deductible only to the extent of investment income (so if you had no investment income, investment expenses cannot be deducted). If the investment property you are talking about is real property (house), then generally the expenses incurred to fix up the house so you could flip it would have to be categorized between repairs and capital improvements. In either case, the expenses would be deducted when you sell the house, thereby reducing the amount of gain on the sale of the house that is taxable. Repairs would be deducted as a selling expense (getting the house ready to sell). Capital improvements, such as refinishing a bathroom or kitchen, etc. would be added to your cost basis in the property.

Answer 2

If you're flipping a home, the costs for improvements adjust the basis of the property and therefore the gain on sale.

If it's a legitimate business, other costs and expenses are borne by the business on Schedule C.

If this is a new business and these costs represent startup costs, they must be capitalized for 2006 but you can use them to reduce income in future years once you start turning a profit with the business.

I'd suggest a consultation with a CPA to get yourself pointed in the right direction. You do have tax considerations that are outside the mainstream as well as business issues that you need guidance on and a CPA is best qualified to help you all around.