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Ask Mark Taylor Your Own Question
Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 968
Experience:  Certified Public Accountant
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I want to build a 2nd home on land I purchased last year. My

Customer Question

I want to build a 2nd home on land I purchased last year.
My question is about the tax laws and write offs:
1. My purchase was part of a partnership and included 50K towards the purchase of certain tools like a tractor. Can I write off this $50k
2. Can I write off the purchase of the land itself, 100K?
3. Can I write off the costs of building the house on this land: architecture services, permitting costs, materials, contractor, etc.?
Thanks,
Paul
Submitted: 3 months ago.
Category: Tax
Expert:  Mark Taylor replied 3 months ago.

Hi, my name is Mark. I will be happy to help you with your questions. You mentioned that a Partnership was involved. I am a little confused. Is the purchase in your name?

Customer: replied 3 months ago.

Thanks Mark,

The purchase is in my name and also in 2 others names. We have a contract between us about ownership stakes as it relates to the amount we put into the property. But the contract is not registered with the county or state. It's just between us.

Expert:  Mark Taylor replied 3 months ago.

Ok, I have a better understanding thank you. You asked if you could write off various this. Do you mean can you deduct these costs?

For the land purchase this would be added to the basis of the property (capitalized).

The costs associated with building the house would also be capitalized.

The tractor would be an asset to the partnership (capitalized). The larger (cost) tools would need to be capitalized and the smaller tools could be expensed.

Customer: replied 3 months ago.

What does it mean that a property or building costs can be capitalized? Is this the same as depreciated? Thanks.

Expert:  Mark Taylor replied 3 months ago.

What is the plan for the property? By capitalized this would be add to the basis of the property. If the property is a rental property the building cost would be depreciated over 27.5 years. The equipment would be depreciated over 5 years (unless accelerated depreciation is possible). If you can provide me more details about your plans for the property I can give you a more precise answer.

Expert:  Mark Taylor replied 3 months ago.

Let me provide an example of capitalization. Let's assume that you have a rental property with a basis of $100,000. You spend $50,000 on improvements to the property. This 50,000 would be added to the basis of the property. The property would be depreciated over 27.5 years if it is residential property.

Customer: replied 3 months ago.

Thanks Mark,

Thanks for letting me know that I can depreciate the equipment on a 5 year basis. Does that mean that I can start doing that for tax year 2015 when I paid 50k into the tools and equipment fund of the property? Or does it begin in the year that the equipment was purchased.

It's not a rental property. It's a second home. So far it is bare land. I am think of spending between 50 and 250K (broad range, I know) on building the house itself.

What I really want is to use the building of my house to offset profits in my business. Is that at all possible? I've thought of calling it a R&D facility or staff retreat center.

Thanks,

Paul

Paul

Expert:  Mark Taylor replied 3 months ago.

The depreciation would in the year that the equipment is placed in service. If the property was use in the development of a rental property you would be able to claim the depreciation. As a second home, since it is personal property you cannot claim the depreciation. What will the equipment be used for once your 2nd home is completed?

Customer: replied 2 months ago.

When my home is finished, the equipment will continue to be used around the land on other home sites. The land is much larger than my home site.

Although I will think of this as my 2nd home, my main home is a rental. This is my 1st home that I own. Does that pertain?

Does Airbnb use make it a rental?

What are the considerations around calling this a music rehearsal facility? R&D facility for alternative energy? Staff retreat?

Expert:  Mark Taylor replied 2 months ago.

You mentioned that the equipment will be used on other home sites. Is this part of a business?

Making this home as your primary residence does not impact the treatment of the equipment. If you make your other home a rental I wanted to make sure that you are aware of Section 121 exclusion. On the sale of your primary residence you are allowed to exclude a gain up to $250,000 ($500,000 if married filing jointly) if you lived in the home for 2 out of the past 5 years.

If you list and advertise the property as a rental, this makes it a rental property. As long as you are actively seeking renters.

If you rent this as a music rehearsal facility you would be able to depreciate the building. There are energy credits that are available depending on the improvement. If you give me more information I can check into these for you.

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