Have a Tax Question? Ask a Tax Expert
Normally direct costs related to the purchase of the house - such as closing costs will be capitalized with the house. Except the points paid and the pro-rated property taxes amount(which can be expensed)- most of the expenses will be capitalized.
However mortgage interest will be treated as the interest on loan to purchase the inventory and hence, can be expensed.
Let me know if you have any question. Bonus and Feedback will be highly appreciated!!!
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases.
For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. So part of this related to your share is the property taxes that is deductible.
Most of the other closing costs except points paid if any will be capitalized.
So say you buy house for $100000 pay $5500 inc closing of which $250 is property taxes and $250 is points paid than
You will record your inventory(house) at 100000+5000 (5500-250-250) and expense $250 as property taxes and $250 as interest.
When you sell the house for $125000(net of closing cost) after 4 months-
Your sales will be $125000
and Cost of goods sold will be $105000
The property taxes and mortgage interest can be claimed as separate line items but as part of either the cost of goods sold or Operating expenses.
Regarding the rest of the amount that you capitalize, yes you are right that if you sell it in 4 months times the end result will be the same since it will be reported on the same tax return. It would be more of an issue when you buy in one year and the sale actually takes place in another year.
So it is basically an accounting policy issue. And therefore, if you capitalize it right for each and every property, it will give you the right amount on inventory unsold is any at the end of the year and also the right profit on sale of any particular property.
Not a Duplicate - We have a house that we could not