Is Mortgage An Expense When Calculating Capital Gains?
I sold an investment property that I had spent 1.5 years renovating. I know that I can deduct all my direct expenses from the net gain, but can I also deduct the mortgage I have paid over this time for the property along with all the utility bills (i.e. electricity in order to run the power tools and gas to keep the site warm while the contractors worked, etc).
Any advice would be appreciated! Thanks, John
As far as I know, you can deduct the interest but not the principal.
[addsig]
Sorry, missed the second part...
You can absolutely claim utilities.
It''s the cost of doing business.
Don't forget to include estimates (or even better, receipts) for gas and meals.
Because you can't do a rehab without fuel to get you there and food to sustain you.
[addsig]
If this is a property you had always intended to flip, then all of your holding costs are added to your basis as part of the cost of goods sold when you complete your Schedule C (1040).
Holding costs include mortgage interest, insurance, property taxes and utilitites. You can also add in your selling costs, to include marketing costs and sales commissions. Sorry, but any amount you paid against your loan balance is not included in the calculations.
But you're getting your loan payments back on the sale, since the loan balance is reduced. It's a wash.
Let's say you bought a property for $100k, fully financed. Then you decided to pay off the mortgage with $100k cash. Later you sold it for $100k and got your cash back. What's the tax effect of paying off the mortgage...NOTHING
All the costs are deductions. Paying the principle is not a cost (you are just shifting asset - cash - into another asset - the property).
I agree with the prior comment that the expenses should be deducted when they are incurred.
Capital improvement are just that so not a deduction. They cause the basis of the home to be adjusted. Hence the purchase price plus capital improvements are added together and that is used to figure the profits when you sell.
John
[addsig]
cjmazur and active_re_investor,
There is a big difference in how you deal with the tax treatment on your flip property reported on Schedule C, and your investment property you might be reporting on Schedule E.
Flip property is merchandise to the business and all of the expenses you noted are holding or carrying costs that are not recognized until the property is sold (included in cost of goods sold).
Consult a professional tax advisor for specific details.
Schedule C is for reporting the sale of merchandise (dealer realty), in other words your flips. Schedule E is for reporting your rental income and expenses for your investment rental property.
How you set up your books to track expenses does not automatically make all those expenses deductible. Consult a professional tax advisor for specific details.