Hello, No the principle payments are not deductible, that is why you need to add the total cost to arrive at basis. The mortgage is just a finincing function and is not considered in the cost. You would just take the sales price less commisions paid to the broker and any closing cost paid by your father to arrive at net sales value. During the building process he can add the utilities as part of the basis or investment into the property. He can take lawyer fees in conjunction with purchasing the property or fee an lawyer represented him in the permit process. He will fill out a 1040 and a 2119 sale of your home, here is a link to the instructions http://www.irs.gov/pub/irs-prior/i2119--1993.pdf. Please note if was a principle resident he would qualify for a one time exemption of $125,000 but since this is considered a second home he can not take that exemption. The 2119 instructions has a worksheet to calculate expenses of sale. You are correct the supporting documents are not included with the return. Be sure to give the accountant a copy of the closing statement you received at the closing. Thanks Tom
Hello again, He starts with sales price and then there is a place on the form to expenses of sale. The new form is not avialable yet so here is an older version http://www.irs.gov/pub/irs-prior/f2119--1997.pdf . He would add up the original cost of the property, add the expenses in building the house and other land improvements and this will be his adjusted basis (cost) of the house. Federal taxes would be 15% plus you would pay state and local taxes. New York state rates above $500,000 is 8.97%. You only will deduct current year taxes and interest on Schedule A.
Here is the full manual on taxes when you sell a home http://www.irs.gov/pub/irs-pdf/p523.pdf Thanks Tom