Q:

Subject: Your Realestate Blogs sale of home

Hi,

Sorry I could find no other way to post to your http://www.taxguru.org blogsite (i am new to blogging).

 

I started construction on a home for myself in 2004.  I was supposed to be taking over a local business that would serve as my income to afford this home.  The business venture fell through and I was unable to afford the home.  I put the home up for sale prior to its completion to make sure I could sell it a.s.a.p. so as not to get stuck with the conversion loan, and its costs.  I sold the completed house in March of 2005.

 

 Since I never occupied the home it was never my main home.  Is there a way to include all the interest paid on the construction loan to the homes basis?  I used to be an accountant and all costs associated with acquiring an asset were part of the cost of that asset.  This would include the interest on the construction loan, and the commission paid to the brokers on the construction loan.  Is this not the case?  According to an  IRS phone advisor, the interest isn’t included in the basis of the home.    

 

I had no income and paid no taxes in 2004 and the over $7,000.00 in interest payments were paid in 2004, is this expense just ...lost because the IRS feels it’s not part of the cost of building the home and asset?

This just doesn't sound right... The interest on the loan was a necessary expense to actually build the home and therefor a cost.  This is not the mortage interest, this is a construction cost.  Am I wrong... if so, is there anyway to recup this expense

A:

You have illustrated why it's a waste of time to try to get tax advice from the IRS on the phone.  Half the time, they are completely wrong with their answers.  Even when they are correct, they will not stand behind what they tell you.  Any info they give you over the phone has as much weight against any future IRS dispute as getting the same info from the clerk at your local 7-11 store.

You should be working with a professional tax advisor who will stand behind his/her advice.

Any experienced tax pro will confirm that it is very proper to capitalize interest on construction loans as part of the cost basis of the property.  In fact, that is a very common IRS audit adjustment, where they reclassify interest payments from immediately deductible expense to a capitalized cost.  That approach increases your tax bite because you only recover your interest expense in later years, and possibly against long term capital gains, which are subject to a lower tax rate than ordinary deductible interest expenses.

There are other tips on how to increase your cost basis and reduce your gain, which I don't have time to detail; but any experienced tax pro can help you with.

Good luck.

Kerry Kerstetter

Follow-Up:

Sir,

 

I sincerely thank you very much for your time and consideration in ansewering my question

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/11/2006 06:48:00 PM Send this post: