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emc011075, Tax adviser
Category: Tax
Satisfied Customers: 2188
Experience:  IRS licensed Enrolled Agent and tax instructor
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We have two homes and one with a renter in it, because we

Customer Question

We have two homes and one with a renter in it, because we couldn't sell it. It needs repairs and a new roof which is going to cost about $17,000. Can I deduct the $17,000 off any profit I make. If I make $20,000 over what I originally paid, but just dropped $17,000 into the home so I can sell it, then do I only pay taxes on the $3000? Also, I purchased my current home (with homestead on it) about 14 months ago. Can I put the $3000 into my current home without paying taxes?
Submitted: 5 months ago.
Category: Tax
Expert:  emc011075 replied 5 months ago.
Hi. My name is ***** ***** I will be happy to help you. It doesn't exactly works that way. When you sell a rental property, you will have to figure out your capital gain or loss by deducting your basis and settlement charges from the sales proceeds and add back depreciation. Your basis include your purchase price and all capital improvements. A new roof would be considered a capital improvement. Here's how you figure out your capital gains: Sales price - purchase price- settlement charges+ depreciation = capital gains. Regarding the second question, no you cannot avoid capital gains by re-investing it into your new home.
Customer: replied 5 months ago.

so I guess I am stupid here, because I am still not getting it! I will have to pay taxes on the $17,000 in improvements? true or not true?

Expert:  emc011075 replied 5 months ago.
The improvements will be deducted as part of your basis from the sales price. But because you used it as rental property you will have to add back the depreciation. You can also deduct your settlement charges so your capital gains may be more or less than 3K.
Customer: replied 5 months ago.

ok thanks

Expert:  emc011075 replied 5 months ago.
You're welcome. Is there anything else I can help you with today?
Expert:  emc011075 replied 5 months ago.
You will use form 4797 to report the sale. If you used the property as your primary residence for at least 2 out of 5 years prior the sale, you may qualify for up to 2050K (500K if filing joinly) of capital gain exclusion. The only thing you will not be able to exclude is the depreciation. And if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. You find the rating bar on the top of the page – 5 stars. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.

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