Buying and selling houses for profit--how to classify expens

bkadams01 · Joined: 17 Feb 2008 Posts: 1

I purchased a home to rehab and make a profit. I have't sold it as
yet so there is no income. I need to know do I do a schedule E or
file as a self employed business?
Are the expenses such as the paint, trim, lighting, plumbing,
fixtures, appliances, etc. all added to the cost basis or can I deduct
as supplies. It would seem that something has to be supplies to be
deducted. I did all that work myself. I did pay a subcontractor to do
the siding and windows.
Whats the benefit of doing a self employed business over a schedule E
or visa versa?

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Archived from group: misc>taxes>moderated

removeps-groups · Joined: 09 Dec 2007 Posts: 98

On Feb 17, 2:07 pm, bkadams01 wrote:

> I purchased a home to rehab and make a profit. I have't sold it as
> yet so there is no income. I need to know do I do a schedule E or
> file as a self employed business?

Schedule E is only if you rent it. If you buy and sell houses
frequently then it is a business, and you don't get the 250K/500K
exclusion. If you lived in the house for 2 of the last 5 years then
you do get the 250K/500K exclusion so long as the IRS does not
consider is a business, and you would just use Schedule D.

> Are the expenses such as the paint, trim, lighting, plumbing,
> fixtures, appliances, etc. all added to the cost basis or can I deduct
> as supplies. It would seem that something has to be supplies to be
> deducted. I did all that work myself. I did pay a subcontractor to do
> the siding and windows.

Only improvements add to the cost basis of the house. Repairs (such
as painting and fixing the plumbing) do not add to the cost basis.
I'm not sure with "trim" is, but it sounds like an improvement. I
would say that adding new lighting is an improvement. On the sale of
a personal residence, you get the 250K/500K exclusion mentioned above
as long as you meet the holding requirements, but you don't get to
deduct repairs. Since 250K is so much of money, it's quite possible
that improvements add to the cost basis of the house (and thereby
decrease your profits when you sell the house), but the profit is
probably still well under 250K.

> Whats the benefit of doing a self employed business over a schedule E
> or visa versa?

If you are running a business that fixes up homes and sells them, you
would probably use Schedule C. You would be able to deduct repairs as
expenses. But I don't know what tax rate you would use when you sell
the house -- thought it could be ordinary income.

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