Indeed, you can write-off qualified expenses that you incurr in connection with the acquisition of the home that is used as an investment property. There are several categories of expenses that you use to offset the potential gain on the sale of the investment property.
These are as follows;
If you are renting this property, then these expenses would be included on your schedule E.
1.The mortgage interest attributable to the purchase of this property.
2.The property taxes that you incur on this property.
3.The annual housing association fees for this property if any.
4.Repairs and maintenance on this property.
5.Insurance on this property.
6.Painting and plumbing expenses.
7.Any expenses that are directly spent on the upkeep of this property incurred during the rental.
8. Utilities expenses.
If you have not rented this property, then the following expenses 1 and 2 are deducted on Schedule A.
Expenses from 4 and 6 are capitalized with cost basis to increase the tax basis of the property. These will be reported on Schedule D as basis and offset against the sale price thus reducing the profit on the sale.
The Utilities and Annual Dues along with the insurance are not deductible and cannot be part of the basis of the property.
TAX RATES ON GAIN OF SALE OF PROPERTY:
The sale of the investment property, (assuming it is a gain of course) is considered either as a short term gain or a long term gain. Each category of gain has a different tax as discussed below.
SHORT TERM GAIN:
If you hold the asset for less than 1 year, the capital gains tax applied is that of your ordinary income tax rate! Thus, if you are in the 28% tax bracket, you would be subject to that rate. The highest rate would be 35% rate.
LONG TERM GAIN:
If you hold the asset for more than 1 year, the capital gains tax applied is 15%. Thus, even if you are in the 28% tax bracket, you would still be subject to the 15% tax rate.
In general, it would seem more profitable to make this a rental property rather then the flip sale that your are hoping in my opinion. Further, I think we might see a more of a rebound in property prices in 2008. Hence, you might enjoy a higher rate of return in holding the property for more than 1 year.
There is an additional tax benefit as well, in that you would have to be pay long term capital gains tax rather than the short term capital gains tax.
GOOD LUCK ON YOUR INVESTMENT!
Last edited by TaxGuru : 05-14-2007 at 07:48 PM.