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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29580
Experience:  Taxes, Immigration, Labor Relations
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I am a carpenter, in 1986 I bought a house lot with a 15K mortgage

Customer Question

I am a carpenter, in 1986 I bought a house lot with a 15K mortgage and then built a house slowly, out of pocket, while living there. So there was no purchase price for the entire home. In 2007 I bought a place in Vermont with a first mortgage of 155K on the first home in New Hampshire and have been renting out the NH property, which I plan to sell eventually but I am now concerned about the tax, I was not aware of the residency requirement, so two main questions, 1) does the first mortgage, currently 130K owed, reduce the profit, and 2) how can I prove the cost when so much was so long ago?
To expand on question 1, if i sold it right now for 300K, would the profit be reduced by the 130K I owe on the mortgage?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to our site!When you took the mortgage - that amount was not included into your taxable income - correct?That is because you were expected to pay it back.So - when you eventually pay it back - that amount is NOT deducted.However - you might be able to deduct mortgage interest and some other costs associated with that mortgage - but when you pay back the principal - that is not deductible..Regarding your first NH property - that is your rental property - correct?So - you would need to report the sale transaction on your tax return.Your will have to report separately the sale of the land and the building - as two separate assets.The gain will be original purchase price - for the lot and the building cost for the house - only the cost of materials and payments to contractors will be included into the basis - the value of your time is not considered.The basis will be adjusted by additional improvements (plus) and depreciation for the time the property was rented (MINUS) - so you will come up with adjusted basis.
Expert:  Lev replied 2 years ago.
The gain will be calculated as
(selling price) MINUS (adjusted basis)
As that property was owned more than a year - the gain will be taxed as long term capital gain - at reduced tax rates - for most taxpayers - not more than 15%.
So if you sell for $300k - that woudl be your selling price.
You would need to determine the adjusted basis as discussed above - and add your selling expenses (Realtor's fees, inspections, closing costs, etc.)
Mortgage repayment woudl not affect calculations and your taxable income will not be reduced by that amount.
Regarding proving your costs...
First of all - you do need to keep your records for all expenses.
If you do not have such records - you might want to re-establish it - be reasonable.
In general - the IRS doesn't require actual receipts for expenses below $75 - so your personal records might sufficient.
Second - you do not need to send your supporting documents to the IRS - just keep for your records.
ONLY if audited - you would need to provide supporting documents.
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